Stock Rally Stalls as Anxiety Brews in Jobs Run-Up: Markets Wrap

Leading indicators point to a roughly as-expected reading in the payrolls report, with headline job growth potentially coming in somewhere in the 180,000-240,000 range, albeit with a big band of uncertainty given the current global backdrop, according to Matthew Weller at Forex.com and City Index.

“With an interest-rate cut largely priced in at this point, the risks may be skewed slightly toward a bounce in the greenback if the jobs report revives the odds of a December pause,” Weller noted. “Though any market moves might be limited as the Fed’s policy decision is more around when rather than if it will pause rate cuts in the near future.”

A stronger headline would be warmly welcomed by markets, supporting a theme of normalization rather than a deterioration on the jobs front, according to Oscar Munoz and Gennadiy Goldberg at TD Securities.

“We expect a stronger reading to initially lead to a significant bear-flattening reaction, but see a likelihood that the initial knee-jerk is pared back after markets assess the details,” they noted. “We remain buyers of duration on dips and will look to higher yields as a possible entry point to reestablishing longs.”

One of the more popular trades within the fixed income markets this year has been the expectation of a steeper Treasury yield curve, with investors either expecting the short-end of the curve to fall and/or the back end to either stay put or even rise, according to Lawrence Gillum at LPL Financial.

However, stronger economic data has priced out the need for the Fed to aggressively cut short-term interest rates and now with recent commentary suggesting the Fed is in no hurry to cut rates, the front end of the curve has stalled at current levels and has kept the long end range-bound.

“If the Fed pauses too long or if they suggest the ‘neutral’ rate is higher than market expectations, markets may become concerned about the deleterious impact of high interest rates, which may actually cause long-term interest rates to fall, further tightening the spread between short and long-term interest rates,” he noted.

On average, the 10-year yield is higher than the fed funds rate by about 1%, so the yield curve will eventually go back to its upward sloping shape but that may not happen until the middle of next year, Gillum concluded.

Since the US central bank began easing rates in mid-September, two-, five- and 10-year Treasury yields have risen from around 3.5% to above 4%. The selloff has been accompanied by traders reducing the chances of sweeping cuts amid resilient economic data, with a little more than three quarter-percentage point cuts over the coming 12 months to around 3.7%.

A string of stronger-than-estimated data points sent the US version of Citigroup’s Economic Surprise Index soaring this year. The gauge measures the difference between actual releases and analyst expectations.

“While the 10-year US Treasury yield may see upward pressure from economic strength and potential policy impacts, yields on shorter-dated notes could still fall, although perhaps not as far as in Europe, as policymakers there have more work to do,” according to Janus Henderson Investors’ 2025 market outlook.

Janus also noted that the global economy is somewhat late in the cycle — warranting caution — yet the data continue to defy expectations, and growth is steady.

What does this mean for investors?

“At the highest level, the combination of rate cuts and other potential accommodative policy in the U.S. and stimulus in China should lend support to the global economy. Still, there are forces at play that make it imperative to apply caution when adding risk,” Janus said. “Broadly speaking, markets have been quick to price in the cycle’s extension, leaving valuations vulnerable to downgrades if risks increase.”

Corporate Highlights:

• American Airlines Group Inc. raised its profit expectations for the final months of the year, the latest signal of strong travel demand heading into the crucial winter holidays.

• Southwest Airlines Co. raised its estimates for unit revenue in the fourth quarter, citing resilient travel demand along with the realization of benefits from execution of its revenue management actions.

• A federal judge rejected Boeing Co.’s plea deal that sought to let the planemaker avoid criminal prosecution over to two fatal 737 Max crashes, in a surprise twist that threatens to prolong the company’s recovery from past scandals.

• Dollar General Inc. narrowed its full-year guidance, underscoring the discounter’s challenges in attracting bargain-hunting shoppers who have seen their purchasing power eroded by higher prices.

• Kroger Co. narrowed its annual outlook and reiterated confidence in its acquisition of rival Albertsons Cos. being approved by regulators.

• Eli Lilly & Co. is spending another $3 billion to build out its US manufacturing footprint as it ramps up production of its blockbuster diabetes and weight-loss drugs.

• Toronto-Dominion Bank suspended its medium-term financial targets amid a review of company strategy as the incoming chief executive officer seeks to move the lender past a historic money-laundering settlement with US authorities.

• Bank of Montreal’s credit issues, which have plagued the lender all year and caused yet another earnings miss Thursday, have now been “contained,” Chief Executive Officer Darryl White said.

• Canadian Imperial Bank of Commerce beat estimates after another quarter of stronger-than-expected credit quality, with its US business showing signs that it’s getting over its problems in commercial real estate.

Key events this week:

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2% as of 4 p.m. New York time

• The Nasdaq 100 fell 0.3%

• The Dow Jones Industrial Average fell 0.6%

• The MSCI World Index was little changed

• The Russell 2000 Index fell 1.3%

• Bloomberg Magnificent 7 Total Return Index rose 0.7%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%

• The euro rose 0.7% to $1.0584

• The British pound rose 0.4% to $1.2752

• The Japanese yen rose 0.3% to 150.07 per dollar

Cryptocurrencies

• Bitcoin rose 1.3% to $99,151.39

• Ether fell 0.4% to $3,827.9

Bonds

• The yield on 10-year Treasuries was little changed at 4.18%

• Germany’s 10-year yield advanced five basis points to 2.11%

• Britain’s 10-year yield advanced three basis points to 4.28%

Commodities

• West Texas Intermediate crude fell 0.1% to $68.45 a barrel

• Spot gold fell 0.7% to $2,631.51 an ounce

This story was produced with the assistance of Bloomberg Automation.

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