Originally published by Rivkin Securities
Rapidly rising bond yields in the US have put a dampener on the rally in stocks. The yield on the US 10-year bond reached 2.84% overnight, edging ever closer to surpassing rates on the Australian 10-year bond. US bond yields were last at this level in 2014 although from a longer term, historical perspective, rates are still very low. While short term bond yields usually follow the cash rate, longer term yields are sensitive to inflation and economic growth expectations. The release of the US employment report on Friday night showed that jobs growth was strong, with 200,000 new jobs created, and average hourly earnings were up 0.3% month on month. Hourly earnings are a closely watched metric as they are expected to be correlated with changes in inflation. The market, therefore, is beginning to price in higher inflation in the future which is also expected to correlate with higher economic growth.
The fall in the Dow Jones Industrial Average on Friday night was 2.5% which is a large fall based on recently low levels of volatility but is not so large if you go back a few years. The S&P 500 fared slightly better, falling just 2.1%. Energy was the worst performing sector (the Energy Select Sector ETF was down 4.2%), although it isn’t immediately clear why this is the case. The WTI oil price fell 1.4% although it is still trading just above $65 per barrel.
Normal correlations didn’t hold up on Friday as virtually all asset classes moved lower. Gold, traditionally a safe-have in times of volatility, also fell, with the price settling at $1,333 per ounce. Likewise, silver prices dropped by almost 3.5%.
Tomorrow the RBA meets to decide interest rates for this month. No change is expected although it will be interesting to see if the board comments on the recent increases in US bond yields.
Data Releases:
- US ISM Non-Manufacturing PMI 2:00 am AEDT