In general, stock markets like to see bond yields moving lower because this implies a looser monetary environment and one more conducive to growth in the corporate sector. However right now we have the opposite case (in the US at least and Europe). With bond yields marching higher, this implies a tighter interest rate environment moving forward which therefore poses an uncomfortable question to the stock market regarding the growth outlook. Can equities (including many in the tech sector who are currently at record-high valuations) continue the Bull Market run if bond yields remain elevated for the next few months? This could be a tough ask.
The US 10-year treasury yield bumped higher on solid US services sector data and is now knocking on the door of the 4.7% level. If US economic data continues to produce upside beats this will raise further doubts about the FOMC’s ability to deliver rate cuts in 2025 in the face of rising inflationary pressures. And if bond yields keep marching north this may well ratchet up anxiety levels on global equity markets given the more challenging growth environment that it would represent.
It’s a big week for economic data in the US, headlined by Non-Farm Payrolls data (NFP) due on Friday. The US jobs market has remained a source of inflationary pressure, and as such the labour market data this week could hold the key for the direction of travel for both bond yields and the USD. The NFP figure is expected to show that 165k jobs were created in December, which is a fairly moderate bar to beat and hence there is scope for an upside surprise particularly with seasonal factors at play. Any result closer to the 200k mark (rather than the 150k level) could support further near-term gains in treasury yields and the greenback. Conversely, a soft, sub-150k reading could act to halt the momentum of the USD.
In commodities, gold has been performing steadily despite the stronger USD. News that China has been buying gold reserves again is one reason gold has been able to whether the effects of a stronger USD. The spot price was seen trading at $2648 in early Asian trading hours on Wednesday, below resistance levels at $2652 and $2667. Support levels await at $2618 and $2599. From gold’s perspective, any softness in the US macro data this week could open the door for gains if investors become more optimistic about the deliverance of interest rate cuts from the Fed in 2025. As such, gold’s fortunes or otherwise this week will be closely tied to the US jobs data.
Elsewhere, oil has continued its positive start to the year even as the demand picture still looks muddy. US crude has gained 3.5% (approximately) so far this month with factors such as a harsh US Winter and hopes for Chinese stimulus helping the cause. Factors working against oil are the high USD and expectations that central banks may be less dovish regarding interest rate cuts this year as inflation figures creep higher. As such, the outlook for oil is neutral given the finely balanced forces at play. For US crude, levels to watch include support at $72.40 and resistance at $75.40, a break of which could open up gains to the next level of resistance at $77.
Aside from the US NFP data, we also have a preview in the form of the ADP private jobs employment data and the US December FOMC Minutes due for release. Elsewhere, Chinese CPI and PPI data on Thursday will also get the attention of the market with deflationary risks remaining on the radar for the world's second largest economy. Ultimately, risk sentiment this week will likely be dictated by how much the US jobs data moves the interest rate needle for the Fed.
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