A look at the day ahead at Stella Qiu’s European and global markets
Most stocks in Asia fell on Friday, following Wall Street futures ahead of the all-important payrolls report, which could further push up government bond yields and the US dollar.
Both Nasdaq futures and S&P 500 futures fell 0.3% after US trading closed overnight for former President Jimmy Carter’s funeral. European stock markets look set for a flat open.
That probably reflects the fear in global bond markets. The 10-year Treasury yield is just above an eight-month peak of 4.73% and is in danger of hitting a key chart level at 4.739%. The 30-year yield rose 11 basis points this week to the highest level in more than a year.
British government bond yields shot to their highest level since 2008 as investors weighed the country’s budget prospects, although they have calmed somewhat for now.
Even yields on Chinese government bonds rose on Friday after the country’s central bank announced it would temporarily suspend government bond purchases. The reason given was a paper shortage, but analysts suspected this was to support the yuan.
Much now depends on the payrolls report, where average forecasts point to a 160,000 increase in jobs in December, with the unemployment rate remaining at 4.2%.
The forecasts are in a relatively narrow range of 120,000 to 200,000, which indicates that there is more room for an outside surprise. There is an additional wrinkle in the annual reanalysis of the household survey, which could see the unemployment rate revised downward in recent months.
A surprisingly strong report will most likely push 10-year yields above 4.739%, with bears hungry for the psychologically important 5% level, a record not seen since 2007.
That would boost the already mighty U.S. dollar, which is on the verge of hitting a two-year high and wreaking havoc in emerging markets.
The stock market reaction could also be negative as high valuations are now being challenged by a rising term premium and higher discount rates.
So investors should pray for a soft report, but not so soft that it threatens the Goldilocks scenario for the US economy.
On the other hand, it would likely take an extremely weak report to change the Fed’s rate cuts, as investors and the Fed are now more focused on how Trump’s policies could evolve in the coming months.
Markets are already back to just 43 basis points of easing this year, equivalent to fewer than two rate cuts, with the first of these not fully priced in until June, when the potential impact of Trump’s proposals will become clearer.
