The Bears are Back: stocks fall and bond yields rise on US employment data

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TL;DR: Bearish sentiment overcomes the markets with stocks down, bond prices down, and volatility up. Concerns over additional base rate hikes appear to be the main driving force and investors are focussed on US unemployment data coming out later today.

📰 What’s moving markets?

• Bond yields are up massively across developed markets with the US 2yr bond exceeding 5%, UK 2yr Gilt over 5.5% and German 2yr Bund at 3.3%. Bond yields move inversely to bond prices, which means this move is indicative of bearish sentiment and heavy investor selling.

• The trigger of this move is not clear but it probably didn’t help that US private payrolls came in at 497k, above expectations of 240k, implying that Fed hikes continue to be ineffective at cooling the labour market (which may be used as a justification to hike rates further).

• Stocks fell yesterday with the EuroStoxx 50 and FTSE 100 losing 3% and 2% respectively, and US markets down 0.8%. There doesn’t appear to be any respite in trading this morning with most Asian markets in the red.

• The US volatility index VIX has rallied 10% up to 15.4.

• The risk-off sentiment has done little to support the US Dollar as traders seem too concerned to short the Yen (USDJPY is a commonly traded risk-on/risk-off currency pair) over potential monetary policy intervention in Japan. JPY actually rallied against the Dollar and is now trading at 143.63.

📊 Chart of the day

The Yield on the UK 10Y Gilt has shot up to 4.7% and now sits comfortably above the highs of c. 4.3% reached last September during the UK Government’s disastrous mini-budget which was reversed a week after.

The recent rally in UK government bonds can be attributed to concerns that the BoE may have to keep rates higher for longer and engineer a recession to bring down inflation.

UK 10 Year Gilt Yield

📅 Coming up this week

Monday 3rd July

• China Manufacturing PMI expected: 50.2, last: 50.9, actual: 50.5

• Germany Manufacturing PMI expected: 41.0, last: 41.0, actual: 40.6

• UK Manufacturing PMI expected: 46.2, last: 46.2, actual: 46.5

• US Manufacturing PMI expected: 47.2, last: 46.9, actual: 46.0

Tuesday 4th July

• Reserve Bank of Australia Base Rate Decision expected: 4.35%, last: 4.10%, actual: 4.10%

Wednesday 5th July

• Euro Zone PPI (YoY) expected: -1.4%, last: 1.0%, actual: -1.5%

Thursday 6th July

• Euro Zone Retail Sales (MoM) expected: 0.2%, last: 0.0%, actual: 0.0%

• US ADP Employment Change expected: 240k, last: 278k, actual: 497k

• US JOLTS Job Openings expected: 9968k, last 10103k, actual: 9.824k

Friday 7th July

• US Change in Nonfarm Payrolls expected: 225k, last: 339k

• US Unemployment Rate expected: 3.6%, last: 3.7%

• US Average Hourly Earnings (MoM) expected: 0.3%, last: 0.3%

• US Labor Force Participation Rate expected: 62.6%, last: 62.6%

📈 The markets at a glance