Bond yields rose after new jobs data showed the US economy added 528,000 jobs during the month of July.
Emily Roland, co-head of investment strategy at John Hancock Investment Management, told Yahoo Finance that July’s strong jobs report shows the economy is “not there yet” when it comes to recession.
Michael Pearce, senior U.S. economist at Capital Economics, was even tougher in an email following Friday’s data: “The unexpected acceleration in nonfarm payrolls growth in July, along with the further cut in the unemployment and the renewed recovery in wage pressure, deriding claims that the economy is on the brink of recession.”
But the bond markets remain worried. And that worry is reflected in the way yields moved after Friday’s data.
After Friday’s jobs report, the yield curve inverted more deeply, with 2-year bond yields jumping 21 basis points to 3.24% and 10-year yields (^TNX) rising by 16 basis points to 2.84%.
Longer-maturity bonds generally yield no less than shorter-maturity bonds, because investors demand more compensation to lend to the US government (or most borrowers, for that matter) longer.
Investors are therefore closely monitoring these “inversions” of the 2-year/10-year spread because they preceded each of the last six US recessions. This yield curve inverted in 2019, before the pandemic, and flashed again in April of this year.
And although Roland said the July jobs data did not reflect a recession at this time, the fact that the curve inverted again on Friday illustrates the deepening of market expectations.
“There are more things that need to happen before the recession fully unfolds,” Roland said. “But [we’re] probably going there with such a deeply inverted yield curve.
The Federal Reserve’s next move is in question, especially as high inflation continues to push policymakers to raise borrowing costs in an effort to cool economic activity. The central bank moved in June and July to raise interest rates by 0.75%, the biggest moves taken in a single meeting since 1994.
The Fed hopes it can moderate economic growth without raising rates so high that companies start laying off workers. The July jobs report supports the Fed’s case for maintaining a healthy labor market, but stronger-than-expected wage gains could push employers to continue passing on rising costs to consumers.
Average hourly earnings rose 5.2% year-over-year in July, showing no deceleration in wage growth from previous months.
“A slower pace of wage growth would clearly add to the goal of bringing down persistently high inflation, but today’s report is unlikely to comfort the Fed on that front,” wrote Rick Rieder of BlackRock Friday.
Markets are now increasingly pricing in the odds of a more aggressive interest rate move at the Fed’s next scheduled meeting, which is expected to conclude on September 21. Fed funds futures are now pricing in a 70% chance of a 0.75% move in September changing from the 0.50% move markets were pricing ahead of Friday’s jobs report.
This reassessment of expectations for Fed rate moves is also behind the move in bond markets, as shorter-dated Treasuries (like the US 2-year) tend to track Fed policies closely. on the federal funds rate.
“The yield curve was inverted, and now it’s really inverted,” Roland said. “And we know that’s a classic harbinger of a recession.”
Brian Cheung is a Fed, economics and banking reporter for Yahoo Finance. You can follow him on Twitter @bcheungz.
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