It would be difficult to overstate how critical Friday’s jobs number is to the prevailing market narrative.
This week’s Treasury selloff has taken 10-year yields to their highest since 2011 and very much unlike the bond weakness that transpired during the week of September 17, this time around the dollar is along for the ride.
The greenback is gunning for its longest winning streak since December and is sitting near its highest levels since mid-August or, more to the point, since right before the dollar took a breather, helping to rescue beleaguered emerging markets which, at the time, looked to be on the brink of an outright crisis amid the collapse in the Turkish lira.
This week’s run up in U.S. yields has reinforced fears of an inflation shock and comments from Jerome Powell served as a reminder of just how data-dependent the Fed is inclined to be. That, in turn, magnifies September payrolls in the minds of market participants who will now be inclined to view another hot wage growth print as still further evidence to support the notion that the Fed means what it “says” in the dots.
According to traders cited by Bloomberg, short-term investors are playing for a big beat in the headline number Friday and/or a second consecutive above-consensus AHE print.
Real yields spiked above 1% this week and any further rise there would likely be a negative for risk.
Meanwhile, folks are still wondering when/if inflation and a rebuilding of the term premium will finally serve as a tractor beam to drag long end yields even higher.
“‘US long rates: is the giant anaconda about to turn‘ is the title of a Bond Vigilantes blog, which questions the consensus view that the US yield curve will invert soon”, SocGen’s Kit Juckes writes, on Friday morning, adding that “the vigilantes see a risk that a strong economy and an overheating labour market finally drag inflation higher and break 30-year Bond yields out of their 2-3.25% range.”
That, Kit says, “provides food for thought on the morning of the US labour market report.”
All of the above has reignited the stock-bond return correlation debate and the question on everyone’s lips is this: “When will stocks buckle under the weight of rising U.S. yields?”
The read-through for emerging markets is clear: Further dollar strength threatens to derail the bounce that began early in September and could well short-circuit the “convergence” narrative.
EM equities are staring down a fifth day of losses in six and look set to log at least their second-worst week in since February.
Tensions, as they say, are running high.