Stocks Decline and Yields Increase as US Jobs Data Indicate Higher Rates – Reuters

By Herbert Lash and Amanda Cooper

NEW YORK/LONDON – Global stock markets experienced a downturn on Tuesday, significantly impacted by a rise in Treasury yields following an unexpected increase in U.S. job openings for August. This development suggests a strong economy, reinforcing expectations that the Federal Reserve may maintain higher interest rates for an extended period.

The dollar initially gained strength but later experienced a steep decline against the yen after surpassing the crucial 150 mark for the first time since October 2022. This prompted speculations of possible intervention by Japanese monetary authorities to stabilize the yen.

Despite requests for comment, Japan’s finance ministry did not respond. However, the dollar’s sharp decrease was notable in the markets.

Michael Brown, a market analyst at Trader X, commented, "It has all the hallmarks of intervention in all honesty." However, some market participants attributed the dollar’s movement primarily to the robust Job Openings and Labor Turnover Survey (JOLTS) for August, which ended a three-month streak of declines, alongside a demonstration of employers retaining their workforce.

Ronald Temple, chief market strategist at Lazard in New York, remarked, "U.S. economic strength continues to surprise on the upside." He indicated that while the Fed’s cycle of rate hikes may be nearing its end, data like today’s introduces the possibility of an additional hike.

The yield on 10-year Treasury notes surged over 12 basis points, reaching 4.806%, marking its highest level since August 2007. In response, the dollar fell by 0.71% to 149.165 yen while remaining relatively stable against the euro. Major U.S. and European stock indices dipped more than 1%, with MSCI’s global stocks gauge declining by 1.49% and the pan-European index falling by 1.1%.

On Wall Street, the S&P 500 lost 1.43%, the Dow Jones Industrial Average dropped 1.53%, and the Nasdaq fell by 2.06%.

Atlanta Fed President Raphael Bostic noted that rising bond yields have yet to significantly slow the U.S. economy beyond what is typical during tightening cycles. He acknowledged the unusual nature of the recent jumps in long-term yields but, along with several colleagues, played down their immediate significance for policymaking.

Analysts predict that bonds, whose prices move inversely to yields, will likely continue facing downward pressure until clear evidence emerges that elevated borrowing costs are negatively impacting the economy.

The yen is particularly affected by the dollar’s rise to 10-month highs and the increase in Treasury yields, driven by a substantial gap between U.S. and Japanese interest rates. Japanese monetary authorities continue to implement policies that keep borrowing rates low, which diminishes the incentive for investors to hold the yen or Japanese bonds. The yield on 10-year Treasuries currently boasts the largest premium over Japanese counterparts since last November, nearing 400 basis points.

Traders see a 27.7% likelihood of another U.S. rate hike in November and a 46.3% chance by December. Futures indicate that the Fed’s lending rate will remain above 5% through September 2024.

SENSE OF URGENCY

Japanese Finance Minister Shunichi Suzuki stated that authorities are closely monitoring the currency market and are prepared to respond, reiterating warnings against speculative movements that do not reflect economic fundamentals. Over the past week, Suzuki has expressed a "high" or "strong" sense of urgency regarding the yen on multiple occasions.

Oil prices rebounded after reaching a three-week low, as investors assessed the impact of a stronger dollar, concerning global economic indicators, and tighter supplies. Futures prices increased by 41 cents to settle at $89.23 per barrel, while another benchmark settled up 21 cents at $90.92.

Gold prices hovered near a seven-month low, pressured by a strong dollar and high bond yields, as market sentiment remained focused on the likelihood of sustained higher U.S. interest rates. U.S. gold futures closed 0.3% lower at $1,841.50 per ounce.