As the stronger-than-expected US non-farm payrolls report consolidates expectations that the Fed will reduce stimulus during the epidemic era, the pattern of global financial markets seems to be changing dramatically this past weekend-10-year Treasury yields rose sharply above the 1.30 per cent mark on Friday, rising weekly for the first time in six weeks, while the dollar index also soared to a two-week high of 92.91. The precious metals market suffered a rare plunge, with spot silver prices plunging 8 per cent off a cliff after the opening of trading on Monday.
The pattern of the US bond market has undergone an unimaginable upheaval in just a few days last week. The yield on the benchmark 10-year u.s. bond rose 7.2 basis points late Friday to 1.301%, a three-week high. Earlier in the week, the yield hit a five-month low of 1.127%. The yield on 10-year inflation-protected bonds, which represents real yields, rose to minus 1.058 per cent, up from a record low of minus 1.216 per cent hit earlier in the week.
Other cyclical yields also surged across the board on Friday's non-farm night. The yield on 2-year Treasuries rose 1 basis point to 0.222% and the yield on 5-year Treasuries rose 4.3 basis points to 0.773%. The yield on 30-year Treasuries rose 8.4 basis points to 1.948%. The closely watched difference between two-year and 10-year yields on the Treasury yield curve was at 108 basis points, 7 basis points higher than Thursday's close.
Data released by the Labor Department on Friday showed that non-farm payrolls surged by 943000 in July, exceeding economists' expectations of 870000, and the June figure was revised up to 938000. In addition, the unemployment rate fell to 5.4 per cent in July, the lowest since March 2020.
The unusually strong non-farm payrolls report comes as the Fed is discussing when and how to reduce its $120 billion-a-month bond purchases. Before that, Federal Reserve Vice Chairman Clarida (Richard Clarida) took the lead in a hawkish statement that surprised some investors on Wednesday, saying that the Fed would start cutting back on bond purchases later this year and then raise interest rates in 2023. The strong non-farm payrolls data undoubtedly provide strong support for the above comments on cutting and raising interest rates.
Kevin Flanagan, head of fixed income strategy at WisdomTree Asset Management, said the latest non-farm report could help shake the Fed's doves and thus support a reduction in support for the economy. He said US bond yields were already ready, and the latest report was "adding fuel to the fire".
Wells Fargo strategists Mike Schumacher and Erik Nelson also pointed out in a report on Friday that while a robust jobs report may not be enough to speed up the Fed's downsizing immediately, it should retain at least some hope of early downsizing in the coming days, which should temporarily support yields and the dollar.
After the release of non-farm payrolls data, there is a more than 90% chance that federal funds rate futures, which are widely used to hedge short-term interest rate risk, will raise interest rates by 25 basis points in January 2023. This is higher than the level after the Fed's interest rate meeting last month. Traders forecast an 82 per cent chance of the fed raising interest rates by 25 basis points by December, up from 78 per cent after the Fed's decision.
Spot silver plunged 8% at the start of trading.
In the foreign exchange market, the dollar index also surged strongly on Friday, recording its biggest weekly gain in seven weeks, helped by higher-than-expected non-farm payrolls in July. At present, the dollar bulls are gradually approaching below the 93 mark, and if this rise can be continued this week, the dollar index may challenge the year's high around 93.43.
At the same time, the precious metals market was hit hard as US bond yields and the dollar rose, with spot gold and spot silver falling 2 per cent and 3 per cent respectively on Friday. After the opening of trading on Monday, the decline in spot gold and silver further magnified-- spot silver prices plunged 8% off a cliff after the opening of trading, refreshing the year's low of $22.63, while spot gold also fell more than 4% at one point to break through the $1700 mark.
The most active COMEX gold futures contract traded 2612 lots in one minute at 06:48 Beijing time, with a total value of US $455 million. Within a minute at 06:57, the contract sold another 3220 lots in an instant, with a total value of US $550 million. Zerohedge, a financial blogging site, said the flash of spot gold had sold orders worth as much as $4 billion.
The decline in gold and silver prices was partly magnified by the scarcity of liquidity in the early Asian session, especially as Japan, the main Asian market, will be closed on Monday because of the mountain day. Sheridan, an analyst at Forexlive, points out that the market does not always move so violently at the beginning of the week and is quiet most of the time, but occasional low liquidity can also lead to large swings in the market.
Phillip Streble, chief market strategist at Blue Line Futures, said: "Friday's non-farm payrolls data is hitting gold because the data exceeded expectations, so the market expects the date of the Fed to scale back its asset purchase program may be advanced, will be announced in September, and it is most likely that the contraction will actually begin in early January."
Daniel Pavilonis, a senior commodity broker in RJO futures, said the good days for gold may be over. The strong jobs report means that Federal Reserve Chairman Colin Powell may start hinting at a reduction in bond purchases as early as the end of August. The dollar index is likely to rise to 95. For gold, this could mean a return to $1673.
There are a lot of good shows in front of Jackson Hall.
The next biggest focus for the US market will undoubtedly be the speech made by Fed policymakers at a seminar of central bankers in Jackson Hole, Wyoming, at the end of this month. Currently, options on 10-year Treasuries, which expire from August 26 to 28, are particularly active.
Of course, there may be a lot of good things to happen in the financial markets in the coming week. The United States will release the latest CPI and PPI data on Wednesday and Thursday, respectively. Employment and inflation are two key factors that influence the Fed's decision.
"I think the key to the coming week will be CPI and PPI. We will get some consumer and business inflation data. All of this will be closely watched, "said Michael Arone, chief investment strategist at State Street Global Investment Advisors.
The Fed has said many times before that inflation is only temporary, but the US inflation data has been high in the "fifth era" for two months in a row. Economists surveyed by Dow Jones expect strong growth again in July, with core inflation (excluding food and energy) expected to rise 0.5 per cent month-on-month and 4.3 per cent year-on-year. Headline inflation in June was 5.4 per cent, while core inflation was 4.5 per cent.
After a number of senior Fed officials showed hawkish tendencies in their speeches last week, a number of Fed officials will make speeches this week. Among them, Atlanta Fed Chairman Bostick and Richmond Fed Chairman Barkin will take the lead tonight, and the stock, bond and foreign exchange commodity market is expected to continue to respond to the idea that the Fed may gradually scale back its bond purchase policy.
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