Stocks and bonds experienced a significant rally on Friday, following a weaker-than-expected jobs report for October. The slowdown in the U.S labor market has reduced the urgency for the Federal Reserve to counter inflation with rate hikes. This shift in market sentiment resulted in the S&P 500 setting course for its best week of the year, with a rise of 6%.
The decrease in yields sparked a broad rally across stock markets, with the Russell 2000 index of smaller companies rising nearly 3% on Friday, after suffering an over 18% decline in recent months.
The yield on the 10-year government bond fell by over 0.1 percentage points, marking a notable decline since last year's collapse of the FTX cryptocurrency exchange. This drop in yields is predicted to end the week at around 4.5 percent, according to market projections.
Investors' focus has recently shifted towards longer-dated market rates, influenced by economic growth and inflation expectations. These rates experienced a surge in August, which raised concerns about the sustainability of the government’s $33 trillion debt. However, these worries were alleviated when the Treasury Department announced plans for shorter-term borrowing, which relieved pressure on longer-dated yields.
Amid these developments, Fed Chair Jerome Powell decided to maintain rates for a second consecutive meeting, which helped calm investors. The weak job growth was interpreted as a positive sign by Ronald Temple, chief market strategist at Lazard (NYSE:LAZ), who suggested that the Fed’s efforts to slow down the economy were effective.
Despite this positive outlook, T. Rowe Price expressed concern over the rising unemployment rate, which increased to 3.9% in October.
Investors are now predicting a lower likelihood of a Fed rate hike in December and expect rate cuts next year. Powell stated that a persistent increase in long-term interest rates would be needed to convince policymakers not to raise their key policy rate again. However, if the bond market reversal continues and yields keep falling, it could paradoxically prompt the Fed to raise its rate in December.
While a slowing economy is expected to lower longer-term rates over time, concerns over who will purchase the upcoming U.S. debt could push rates in the opposite direction.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.