On Thursday, MSCI’s global index of stocks experienced a decline, while Treasury yields rose following a surge in U.S. private payrolls. The unexpected increase in private payrolls prompted concerns that interest rates would remain elevated for an extended period.
ADP, a payroll company, reported that private payrolls in June rose by 497,000, surpassing economists’ expectations of a 228,000 increase and the previous month’s figure of 267,000. However, the Labor Department revealed that initial claims for state unemployment benefits rose by 12,000 to 248,000 for the week ending July 1, with a revision showing 3,000 fewer applications than initially reported.
These developments fueled worries that a more hawkish stance from the central bank would be necessary. Lorie Logan, President of the Federal Reserve Bank of Dallas, stated that the persistently high inflation outlook and a stronger-than-anticipated labor market “calls for more-restrictive monetary policy.”
Following the labor market data, U.S. Treasury yields climbed, as expectations for aggressive rate hikes by the Federal Reserve intensified in an effort to combat stubbornly high inflation. While the U.S. dollar initially pared losses against major currencies after the report, stock indexes across the board turned negative.
James Ragan who is the Director of Wealth Management Research at D.A. Davidson, commented on the prevailing uncertainty regarding the strength of the economy and the potential actions the Fed may take to address inflation pressures.
Although ADP’s data does not always align with the government’s monthly jobs report, which was due to be released on Friday, the significantly higher private payrolls raised concerns that Friday’s report could also surpass expectations.
The Dow Jones Industrial Average fell 366.38 points or 1.07%, closing at 33,922.26. The S&P 500 lost 35.23 points or 0.79%, ending at 4,411.59, while the Nasdaq Composite dropped 112.61 points or 0.82%, finishing at 13,679.04.
The S&P 500 recorded its largest daily percentage decline since May 23, while the Dow experienced its biggest single-day fall since May 2.
MSCI’s all-country world price index recovered slightly to a 1.25% decline, marking its largest one-day percentage drop since April 25. Previously, it had fallen as much as 1.7%.
Alex Coffey, Senior Trading Strategist at TD Ameritrade, highlighted the market’s concerns about the economy and the Federal Reserve’s commitment to tightening monetary policy.
Coffey suggested that with no signs of deterioration in the labor market, the increasingly tight monetary policy would likely lead to an economic slowdown.
According to CME Group’s FedWatch tool, money market traders now see a 92.4% chance of a quarter-point rate hike at the bank’s July 26 meeting. Additionally, traders were relying on the 25.9% chance of another hike in September, as compared to the 18.1% on July 5th.
D.A. Davidson’s Ragan noted that futures indicate minimal expectations of rate cuts until June 2024, contrasting with recent bets on potentially two rate cuts later in 2023.
In the Treasury market, 2-year Treasury yields rose above 5% for the first time since early March and reached their highest levels since June 2007. Benchmark 10-year notes experienced an increase of 8.8 basis points, reaching 4.033% from 3.945% on Wednesday. The 30-year bond’s yield rose by 5.3 basis points to 3.9969%, while the 2-year note’s yield climbed 4 basis points to 4.9912%, briefly reaching as high as 5.12%.
In currency markets, the dollar index fell by 0.203%. The euro rose by 0.32% to $1.0886, the Japanese yen strengthened by 0.38% against the greenback to 144.11 per dollar, and sterling traded at $1.2737, a 0.26% increase for the day. Oil prices remained relatively unchanged as the market processed the increased likelihood of a U.S. interest rate hike, which could potentially impact energy demand.