For a stock market wondering if the United States is headed for a recession, Friday’s jobs report brought good news – we’re not there yet. The bond market reaction, however, provides further evidence that this is brewing.
The US economy added 372,000 jobs in June, beating forecasts of 250,000, while the unemployment rate remained at 3.6%, exactly where expected. Despite some downgrades to previous months of job growth, the report suggests the economy is still strong, and almost certainly not yet in recession. It also means that the Federal Reserve can continue to raise interest rates. “Overall, it was a solid release that provided plenty of room for the Fed to hike 75 basis points this month,” wrote Ian Lyngen of BMO Capital Markets.
Financial markets are reacting as expected. The 10-year yield jumped 0.055 percentage points to 3.063%, reflecting a stronger economy, but major stock indexes are down. Futures contracts on the
which is most sensitive to rising yields, fell 1.5%, while futures on the
Dow Jones Industrial Average,
which is most sensitive to economic growth, fell by only 0.5%.
futures, down 0.9%, shared the difference. Higher yields push valuations down, all else being equal.
If recession fears are put aside, at least for a day, rising bond yields should keep them firmly in focus. The 10-year yield, at 3.063%, is 0.04 percentage points lower than the two-year Treasury yield of 3.103%, causing what is known as an inverted yield curve. An inversion of the yield curve has been a good predictor of future recessions, but only if it is deep – it qualifies – and long-lasting. We are getting to the point where he is starting to qualify. That doesn’t mean a recession is happening right now, just that it’s coming, probably in the next six months or so, if history is any guide.
The difference between the 3-month and 10-year yields is always positive and would give a better reading of the imminence of a recession. Right now, that difference is still more than a full percentage point in positive territory, although it has narrowed fast enough to indicate some market weakness in the months ahead, according to Sentiment Trader’s Dean Christians. “The spread of the 10-year to 3-month Treasury yield curve has contracted significantly,” he wrote. “After similar signals, equities are showing stable to slightly negative returns over a 1-2 month period.”
This likely means that the debate between rate hikes and recessions will continue, making a disorderly market more likely. “Stocks need to determine whether good news is good news and no recession, or whether a weak economy will force the Fed to ease, which would be good for stocks,” writes Andrew Brenner of Nat Alliance Securities, who expects that the S&P 500 remains between 3800 and 4100.
Try not to read too much into it until the debate is settled.
Write to Ben Levisohn at [email protected]