Stocks and bonds rose on Friday, extending a sharp reversal after new data on the health of the U.S. labor market capped a tumultuous week for investors.
The yield on 10-year government bonds, which underpin rates on everything from mortgages to commercial loans, fell more than 0.1 percentage point on Friday, another big drop for a market where daily moves are often measured. in hundredths of a point. Yields move inversely to prices.
A new report showed the U.S. economy added fewer jobs than expected in October, a sign of a cooling labor market that could reduce the need for the Federal Reserve to raise its key rate again as it aims to slow the economy to combat the inflation. .
That helped boost the stock market, which had sold off as rates rose in recent months. The S&P 500 was expected to finish the week nearly 6 percent higher, on track for its best week of the year.
The Federal Reserve began raising its key short-term rate in March of last year, but more recently investors had become obsessed with longer-term market rates, which are driven by a variety of factors such as economic growth and inflation. inflation expectations, not just the policy decisions of the Federal Reserve. . These long-term rates began to rise in August, intensifying concerns about the sustainability of the government’s $33 trillion debt, among other concerns.
Those concerns eased somewhat this week. Investors welcomed the Treasury Department’s plans to shift its borrowing toward shorter-term debt, taking pressure off longer-term yields. Then Federal Reserve Chairman Jerome H. Powell appeared to calm investors’ nerves after the central bank held rates steady for the second straight meeting. Weaker-than-expected job growth further suggested that the Federal Reserve’s efforts to slow the economy were having an effect.
“To me, the jobs report is unquestionably positive,” said Ronald Temple, chief market strategist at Lazard. “I think it’s a very good signal to the Fed that they are slowing the economy and they don’t need to raise rates again.”
The 10-year Treasury yield is on track to finish the week at around 4.5 percent, down about 0.3 percentage points on the week, its biggest drop since the week cryptocurrency exchange FTX crashed last year. past. Still, the yield is still more than half a percentage point higher than at the beginning of August.
This week’s drop in yields triggered a broad rally in stock markets. The Russell 2000 index of smaller companies, which are more sensitive to the ebbs and flows of the economy, rose nearly 3 percent on Friday. That index had fallen more than 18 percent in recent months.
Some investors warned that the market reaction might not reflect such a rosy story. The unemployment rate rose to 3.9 percent in October, from 3.8 percent the previous month, while the number of people working or actively looking for work decreased.
“What worries me is that when we see such an increase in the unemployment rate, it tends to increase,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “That’s what I’m following closely. Otherwise, the employment slowdown appears orderly.”
After the jobs report, investors have reduced the likelihood that the Federal Reserve will raise interest rates at its next meeting, in December, and have advanced expectations of rate cuts next year, a sign that they believe the Fed Federal is done raising rates and the economy will continue to slow.
Federal Reserve Chair Powell said Wednesday that the recent rise in long-term interest rates, which raises borrowing costs and slows the economy, effectively doing the Fed’s job, would have to be “persistent.” so that he can play his role. play a role in convincing the authorities not to raise their official interest rate again.
But if the recent reversal in the bond market persists and yields continue to fall, then it could “ironically” cause the Federal Reserve to raise its rate in December, said Mark Dowding, chief investment officer at asset manager BlueBay, because cutting costs of debt and alleviate the brakes on the economy.
And while a slowing economy would be expected to lower long-term rates over time, concerns about who will buy the avalanche of debt the US government is about to issue could push rates in the opposite direction.
“There are two opposing forces at play,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. “One is the slowdown in the economy, which is now entrenched and will drive down yields. But over time, the Treasury will issue more debt and those yields will rise again. “We are in a crosscurrent right now.”
Jeanna Smialek contributed reports.