The 10-year U.S. Treasury yield climbed to 4% on Monday, bolstered by strong labor market data that eased recession concerns and shifted market expectations regarding future rate cuts. While this initially provided some support to the dollar and equities, it also tempered the enthusiasm of equity bulls who had been anticipating more aggressive rate cuts from the Federal Reserve.
Jobs Data Calms Recession Concerns
Last Friday’s U.S. labor market report showed the economy added more jobs in September than expected, marking the largest increase in six months. This unexpected growth helped alleviate fears of an impending recession and reshaped expectations for the Federal Reserve's upcoming policy decisions. The solid labor report has become the primary focus of market sentiment as investors look ahead to Thursday’s Consumer Price Index (CPI) report.
Rate Cut Bets Receding
Before the jobs data, markets had been leaning toward a 50-basis-point rate cut at the Federal Reserve's November 7 meeting. As of last week, the probability of such a cut stood at over 50%. However, in light of the strong employment numbers, traders have since scaled back these expectations, leading to higher yields on government bonds. On Monday, the 10-year Treasury yield rose by 2 basis points, hitting 4% for the first time in two months, building on a 13-basis-point jump last Friday.
Mixed Impact on Global Equities
European stocks experienced a slight decline, with the STOXX 600 index dipping 0.2%. While financial stocks like banks, which benefit from rising rates, saw gains, real estate companies—which are more sensitive to rate increases—suffered losses.
In the U.S., S&P 500 futures fell 0.3%, reflecting a more cautious tone in the stock market. However, the index itself had gained 0.9% on Friday, showing resilience in the face of economic shifts, and remains near its all-time highs.
"No Recession, No Inflation" – A Positive Outlook?
Samy Chaar, chief economist at Lombard Odier, weighed in on the market's shifting outlook:
"If we just focus on the macroeconomic picture, there is no recession, no inflation, and central banks are in a rate-cutting cycle. On top of that, China is contributing positively. So for now, it seems safe to enjoy the ride," Chaar remarked.
However, he did caution that economic risks are not completely off the table, particularly in Europe, where Germany’s economic challenges continue to weigh on the region. Additionally, geopolitical tensions, including the ongoing U.S. election cycle and the escalating situation in the Middle East, pose potential risks to global markets.
Geopolitical Tensions Escalate
As markets assess the economic landscape, geopolitical tensions are also intensifying. Early Monday, Hezbollah rockets hit Haifa, Israel’s third-largest city, as conflict in the Middle East spread further. This escalation comes on the one-year anniversary of the Gaza war and adds another layer of uncertainty to global markets, particularly as Israel appears poised to extend its ground operations in southern Lebanon.
Brent Crude Pushes Higher
In the commodities market, Brent crude futures continued their upward momentum, rising 1.3% to $79.08 per barrel—just shy of Friday’s one-month high. Last week, Brent posted its biggest weekly gain in more than a year, supported by supply concerns and geopolitical risks.
Asian Markets Show Resilience
Asian markets, particularly in China, also saw gains. The broader Asia-Pacific index rose, though Chinese onshore markets remained closed for a holiday until Tuesday. Investors are waiting to see if Chinese stocks can maintain their momentum, buoyed by recent announcements of incoming economic stimulus from the Chinese government.
Dollar Strengthens Against Yen
Higher U.S. yields provided strong support for the dollar, especially against the yen, which is highly sensitive to interest rate differentials. On Monday, the dollar reached 149.10 yen, its highest level since mid-August. The Japanese yen regained some ground after Japan’s top currency diplomat, Atsushi Mimura, stated that officials were closely monitoring foreign exchange markets for speculative trading, but the dollar still held firm at 148.3 yen.
The broader dollar index, which tracks the greenback against a basket of major currencies, was at 102.5, close to the seven-week high it touched on Friday. Analysts at ING noted that a lack of clear catalysts in the coming weeks suggests the dollar is likely to consolidate recent gains rather than reverse course.
Euro Weakens Amid ECB Rate Cut Expectations
Across the Atlantic, European Central Bank (ECB) policymakers have shifted their tone, with many now appearing more open to a rate cut at the ECB's next meeting. This dovish stance has put pressure on the euro, which has struggled against the strengthening dollar.
On Monday, French Central Bank Chief Francois Villeroy de Galhau became the latest ECB official to signal the likelihood of a rate cut, telling an Italian newspaper that an October cut seemed probable.
As a result, European bonds reacted to the moves in the U.S., with Germany’s 10-year Bund yield rising 4 basis points to 2.54%, marking a one-month high.
Gold Remains Steady
In the commodities market, gold prices remained flat, holding at $2,650 per ounce. Despite rising geopolitical tensions and fluctuations in other markets, gold has shown little volatility, maintaining a stable position as investors wait for more concrete developments in both global economics and geopolitics.
Conclusion: A Shifting Market Landscape
The rise in the 10-year Treasury yield to 4% signals a significant shift in market expectations following strong U.S. labor data. While this has eased recession fears and boosted confidence in the U.S. economy, it has also prompted traders to rethink the likelihood of aggressive rate cuts from the Federal Reserve. Global markets remain cautious, balancing positive economic indicators with ongoing geopolitical risks, particularly in Europe and the Middle East. The next key data point will be Thursday’s U.S. CPI report, which could further clarify the direction of both inflation and interest rates.