Bond yields higher, stocks lower

It was eventful in both fixed income and equity markets yesterday to say the least – government bond yields spiked higher and stock sold off – but currency markets were relatively becalmed; the euro was little changed on the day against both the dollar and sterling at just below $1.09 and circa 85.5p respectively, as was the pound against the US currency at over $1.27.

Bond yields rose further after much stronger than expected employment data in the US, with US 10-year yields ending the day about 12bps higher at 4.05% and UK and German 10-year yields closing about 15bps higher at 4.65% and 2.60% respectively. Meanwhile, in equity markets, European stocks shed around 3% while US indices fell by between 1% and 1.5%.

Private sector employment in the US rose by almost 500k in June according to the latest ADP report, more than double the consensus forecast of circa 225k, which throws the spotlight even more on today’s official employment (“payrolls”) report from the Bureau of Labour Statistics.

Fed member Logan says she remains  “very concerned about whether inflation will return to target in a sustainable and timely way,” adding that she thinks a “more-restrictive monetary policy will be needed to achieve” the Fed’s 2% inflation target.

ECB’s Lagarde says “a simultaneous increase in both (profit margins and wages) would fuel inflation risks, and we would not stand idly by in the face of such risks.”

As mentioned, the key data release today is the official employment report in the US – the consensus expects the economy to have added circa 230k jobs last month, with the unemployment rate seen dipping to 3.6% and hourly earnings growth seen edging down to 4.2% y-o-y.