The latest U.S. nonfarm payrolls report came in much stronger than expected, as the economy added 162,000 jobs in August compared with forecasts of around 56,000. This improvement in the labor market revived expectations of a Federal Reserve rate hike, pushing Treasury yields higher.
Two year Treasury yields rose to around 4.37%, while 10 year Treasury yields approached 4.80%. Higher yields have become a major source of pressure on stocks, as they increase the discount rate used to value companies’ future earnings, placing particular pressure on growth stocks and the technology sector.
Markets are now turning their attention to the August CPI report, scheduled for release on September 11. Headline inflation is expected to remain elevated, while core inflation is expected to ease to around 2.4% year over year. A softer than expected inflation reading could push Treasury yields lower and ease pressure on stocks. On the other hand, a stronger than expected inflation reading would reinforce expectations that interest rates may remain elevated for longer and could drive Treasury yields to higher levels.
At the moment, the main driver for stocks is not only the possibility of a Federal Reserve rate hike, but also how high Treasury yields can climb. A continued rise in yields could place further pressure on equities, while slowing inflation may reverse part of the recent yield surge.
You can now benefit from LDN company’s services through the LDN Global Markets trading platform.
