It seems that stocks are enjoying some much-needed relief today as the pressure from the bond market finally eases a little. That said, I wouldn’t get too comfortable with the calmer mood just yet as the US jobs report is still to come.
10-year Treasury yields have slipped back to around 5.23% after touching 5.34% yesterday, the highest level since 2002. Meanwhile, 10-year German bund yields are down to roughly 3.43%, well off the highs earlier this week closer to 3.65%. The retreat in yields has been enough to give equities some room to recover.
The DAX is now trading up by 1.1% today while the CAC 40 is gaining 1.0%. US futures are also holding up well with S&P 500 futures around 0.5% higher as tech shares remain firm ahead of the open later.
The feeling is that after the sharp selloff in bonds earlier this week, investors aren’t necessarily asking for yields to collapse. I reckon they just need yields to stop rising.
If long-term yields are to push higher almost every session, markets are forced to continuously reprice equity valuations, borrowing costs and the monetary policy outlook. Once that pressure eases, even if temporarily, then some of the urgency to sell disappears.
So, that appears to be what is helping stocks today.
Now, the only problem is that the US jobs report could very quickly change the conversation again.
With Treasury yields already sitting near multi-decade highs, markets will be especially sensitive to anything in the jobs report that reinforces the higher-for-longer rates narrative. And that means it won’t necessarily be just about the headline payrolls number.
A strong jobs reading, if also accompanied by firmer wage growth, could put upward pressure back on Treasury yields and quickly test the rebound that we’re seeing in stocks.
On the flip side, a softer report would likely offer some added breathing room in helping to extend the pullback in yields and the recovery in risk sentiment. Having said that, one report is hardly enough to signal a change in the broader trend.
At the long-end of the curve, there are still broader structural forces at play that is keeping the bond market under pressure. Besides stubborn inflation concerns, mounting fiscal and debt supply risks as well as rising term premiums remain important drivers behind the broader selloff in longer-term bonds.
And all of that will not change because of one softer non-farm payrolls report.
So while the market mood is calmer for now, the overall picture still feels very fragile.
A softer NFP may yet decide whether today’s relief lasts a little longer. But even then, the bigger forces weighing on the bond market aren’t going anywhere.
This article was written by Justin Low at investinglive.com.