NEW YORK, Jan 5 ― Bonds sold off and global equity markets failed to fully shake off New Year blues yesterday after US unemployment data indicated a resilient labour market, tempering expectations of Federal Reserve interest rate cuts in 2024.
The yield on 10-year Treasuries jumped above 4 per cent in a sharp reversal from last week, when the benchmark note slid to a five-month low of 3.783 per cent on recent data showing inflation by some measures had declined close to the Fed's 2 per cent target.
The focus has turned to the US central bank's efforts to steer the economy to a soft landing.
“The real federal funds rate doesn't need to be as high and as restrictive as it currently is. But the Fed will need more evidence of inflation progress to get those cuts,” said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management in New York.
“So that's where we would say, 'You know what? The market is probably a little bit ahead of itself here in terms of the number of cuts and the need to cut.'“
Major equity indexes in Europe closed higher, with the pan-regional STOXX 600 index up 0.69 per cent, helping MSCI's gauge of stocks across the globe to tread higher for most of the session.
Wall Street closed mixed, with the Dow eking out a gain as the Nasdaq and the S&P 500 dived, to pull MSCI's global index close down 0.03 per cent.
The number of Americans filing new claims for unemployment benefits fell more than expected last week, data showed. Separately, the ADP National Employment Report showed US private employers hired more workers than expected in December.
“The combination of better-than-expected ADP and lower-than-expected-jobless claims was enough to inspire a little bit of selling pressure on Treasuries,” said Ben Jeffery, a US rates strategist at BMO Capital Markets in New York.
The reports “definitely moderate the odds of a near-term rate cut from the Fed just given the fact that the job market remains in a relatively good place,” he said.
The yield on 10-year Treasuries rose 9.2 basis points to 4.00 per cent.
Minutes from the US central bank's December policy meeting offered few clues on when the Fed might start cutting rates. Traders see a 66.4 per cent chance for at least a 25-basis point (bps) rate cut in March and about a 92 per cent probability in May, according to the CME Group's FedWatch.
Fed policymakers have indicated they expect three rate cuts this year. Futures traders have trimmed the total estimated reduction by December to just over 137 bps from expectations of more than 160 bps late last year.
On Wall Street, the Dow Jones Industrial Average rose 0.03 per cent, the S&P 500 lost 0.34 per cent and the Nasdaq Composite dropped 0.56 per cent.
Data in Europe was encouraging. Both German and French inflation surveys showed prices moving up again, bolstering forecasts that euro zone-wide inflation rose back to 3 per cent last month.
European bond yields reversed early declines and the euro rose further versus the dollar, putting it up 0.25 per cent to US$1.0948. The dollar index edged down 0.01 per cent.
Against the Japanese yen, the greenback rose to a two-week peak of ¥144.87 a day after jumping nearly 1 per cent.
HCOB's Composite Purchasing Managers' Index (PMI), a survey-based gauge of the euro zone's economic health, was revised up for December to match November's 47.6 after an earlier estimate of 47. It was still below the 50 mark separating growth from contraction.
The German 10-year yield, the euro zone benchmark, was last up 2.2 basis points (bps) at 2.127 per cent having hit a one-year low of 1.896 per cent last week. France's yield inched up as well, to 2.677 per cent.
Asian shares closed slightly lower, as did Japan's Nikkei on its first trading day of the year.
Oil settled lower in a choppy see-saw session, as massive weekly gasoline and distillate stock builds overshadowed a larger-than-expected crude stock draw.
Brent crude settled down 66 cents to US$77.59. During the session it both rose and fell over US$1. US West Texas Intermediate crude futures CLc1 fell 51 cents to settle at US$72.19.
Gold held steady after four sessions of declines as investors braced for the US non-farm payrolls data.
U.S. gold futures settled up 0.4 per cent at US$2,050.00 an ounce. ― Reuters