Rising Yields and Strong Jobs Data Weigh on Markets as Investors Brace for Fed Signals | Daily Market Analysis

Key events:

• Eurozone - ECB's Schnabel Speaks
• Eurozone - Eurogroup Meetings
• Eurozone - ECB McCaul Speaks
• USA - FOMC Member Bostic Speaks

The S&P 500 slid lower on Monday, pressured by a rise in Treasury yields after a much stronger-than-expected jobs report reduced hopes for a sizable interest rate cut by the Federal Reserve next month.

The Dow Jones Industrial Average fell by 398 points, or 0.9%, while the S&P 500 and NASDAQ Composite dropped 1% and 1.2%, respectively.

The climb in Treasury yields following Friday’s jobs report weighed heavily on equities. Investors had been hoping for a more significant Fed rate cut at the upcoming November meeting, but the latest labor data has tempered those expectations. As a result, the yield on the 10-year Treasury surpassed 4% for the first time since August.

In the days ahead, several Federal Reserve officials are expected to speak, and markets will be watching closely for any monetary policy clues, especially in the wake of Friday’s strong jobs report. Minneapolis Fed President Neel Kashkari voiced his support for the robust September job figures, highlighting the strength of the US economy. According to Kashkari, the labor market remains resilient, which is a key area of focus for the Fed moving forward.

This week also marks the start of the third-quarter earnings season, with major banks such as JPMorgan Chase and Wells Fargo set to report their quarterly results on Friday. Investors will be closely scrutinizing these earnings to assess how well corporations have managed to navigate the challenges of high interest rates and persistent inflation.

The outcomes are critical as bullish market participants hope that corporate earnings will justify the stock market’s elevated valuations. The S&P 500 is up 20% for the year and remains near record highs despite recent market volatility, driven in part by rising geopolitical tensions in the Middle East.

On the currency front, the Japanese Yen gained momentum for the second consecutive day against the US dollar, building on an overnight recovery. The Yen strengthened following comments from Japanese officials that fueled speculation about possible government intervention in the foreign exchange market to support the currency.

In addition to these domestic factors, geopolitical risks contributed to the Yen’s rise as investors sought safe-haven assets. The combination of these influences pushed the USD/JPY pair to around 147.50 during the Asian session. However, diminishing expectations for another interest rate hike by the Bank of Japan in 2024 may temper the enthusiasm of Yen bulls, potentially limiting further gains.

At the same time, the Australian Dollar lost ground on Tuesday, pressured by concerns about China's economy and a risk-off sentiment driven by geopolitical tensions in the Middle East. Comments from China's National Development and Reform Commission indicated that the country’s economy is facing increasing internal and external challenges, which weighed heavily on the Australian Dollar. As China is Australia’s largest trading partner, concerns over China's economic health tend to have a direct impact on the AUD. Still, the Australian currency could find some support from the Reserve Bank of Australia’s hawkish tone following its September meeting.

In New Zealand, the NZD/USD pair saw renewed selling pressure during Tuesday’s trading session, extending its losing streak for the sixth straight day. The pair fell to a one-month low, with traders eyeing a critical level at the 200-day Simple Moving Average (SMA) near the 0.6100 mark. Investors were cautious as China’s economic troubles and the prospect of a rate cut by the Reserve Bank of New Zealand weighed on the New Zealand dollar. Meanwhile, the US dollar remained relatively strong, although it softened slightly after touching a seven-week high on Friday. Expectations for further aggressive rate cuts by the Federal Reserve have diminished, which provided some support to the dollar amid ongoing geopolitical uncertainties.

The British Pound was also under pressure, dropping by 0.25% on Monday and closing below the 1.3100 level for the first time since mid-September. Investors are growing increasingly pessimistic about the chances of a large rate cut by the Federal Reserve, with expectations now shifting towards a more modest quarter-point cut at the November meeting. The hopes for outsized rate cuts have been scaled back following last week’s blockbuster Nonfarm Payrolls report, which bolstered confidence in the US labor market and reduced the likelihood of drastic moves from the Fed.

According to the CME’s FedWatch Tool, traders are now assigning only a one-in-five chance of no rate cut at all in November, significantly lower than previous estimates for a larger, more aggressive cut. With rate markets now pricing in a more cautious stance from the Fed, investor appetite for riskier assets has weakened, further dampening the outlook for currencies like the GBP.

Looking ahead, data releases this week will play a crucial role in shaping market sentiment. GBP traders are awaiting the release of the UK’s Gross Domestic Product (GDP) report on Friday, which will provide more clarity on the state of the UK economy. Meanwhile, Greenback traders are focused on the upcoming US Consumer Price Index (CPI) inflation figures due on Thursday, which could influence the Federal Reserve’s policy decisions at its November meeting.

In conclusion, Monday's market movements were driven by a combination of rising Treasury yields, strong labor market data, and heightened geopolitical risks. With key earnings reports, speeches from Federal Reserve officials, and critical economic data on the horizon, investors will remain on high alert, watching for further clues on the direction of monetary policy and the global economy. The coming days are set to provide important insights that could shape market trends heading into the end of the year.