Huge turnaround in bonds and rally in stocks Cap. Wild week for markets

Stocks and bonds rose on Friday, leading to a sharp reversal after new data on the health of the US labor market capped a tumultuous week for investors.

The yield on 10-year government bonds, which forms the basis for interest rates on everything from mortgages to corporate loans, fell by more than 0.1 percentage point on Friday, another big drop for a market in which daily movements are often measured in hundredths of a point. Yields move inversely to prices.

A new report shows that the U.S. economy created fewer jobs than expected in October, a sign of a cooling labor market that could reduce the need for the Federal Reserve to raise policy rates again as it aims to slow the economy to to combat inflation. .

That helped revive the stock market, which had sold off in recent months as yields rose. The S&P 500 would end the week nearly 6 percent higher, on track for its best week of the year.

The Fed began raising its key short-term interest rate in March last year, but investors had recently become fixated on longer-term market rates, which are driven by a variety of factors, such as economic growth and inflation expectations, and not just the policy decisions of the Fed. . These long-term rates began rising in August, compounding concerns about the sustainability of the government’s $33 trillion debt pile, among other concerns.

These concerns have subsided somewhat this week. Investors welcomed the Treasury’s plans to shift borrowing to shorter-term debt, which would take pressure off longer-term interest rates. Then Fed Chairman Jerome H. Powell appeared to calm investors’ nerves after the central bank held rates steady for a second straight meeting. Weaker-than-expected job growth further indicated that the Fed’s efforts to slow the economy were having an effect.

“To me, the jobs report is undeniably positive,” said Ronald Temple, chief market strategist at Lazard. “I think this is a very good signal to the Fed that they are slowing down the economy and they don’t need to raise rates again.”

Ten-year Treasury yields are on track to end the week at around 4.5 percent, down about 0.3 percentage points for the week, the biggest drop since the week the cryptocurrency exchange FTX collapsed last year. Yet interest rates remain more than half a percentage point higher than at the beginning of August.

This week’s drop in yields sparked a broad rally in stock markets. The Russell 2000 index of smaller companies, which are more sensitive to the ebbs and flows of the economy, rose nearly 3 percent on Friday. That index had fallen more than 18 percent in recent months.

Some investors warned that the market reaction might not reflect such a rosy story. The unemployment rate rose to 3.9 percent in October, compared to 3.8 percent the month before, while the number of people working or actively looking for work fell.

“What worries me is that when we see such a rise in unemployment, it tends to rise further,” said Blerina Uruci, chief US economist at T. Rowe Price. “I’m keeping a close eye on that. Otherwise, the employment slowdown appears orderly.”

After the jobs report, investors downgraded the likelihood that the Fed will raise rates at its next meeting in December and raised their expectations for rate cuts next year, a sign that they believe the Fed is done raising rates and that the economy will continue to slow.

Mr Powell, the Fed chairman, said on Wednesday that the recent rise in long-term interest rates, which is raising borrowing costs and slowing the economy, essentially doing the Fed’s job for it, would have to be “persistent” to prevent can keep playing. play a role in convincing policymakers not to increase their key policy rate again.

But if the recent bond market rally continues and yields continue to fall, it could “ironically” make the Fed more likely to raise rates in December, said Mark Dowding, chief investment officer at asset manager BlueBay. lower financing costs and ease the brakes on the economy.

And while a slowing economy is expected to push longer-term interest rates lower over time, concerns about who will buy the flood of debt the U.S. government is about to issue could push rates in the opposite direction .

“There are two opposing forces at work,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute. “One is the slowing economy, which is now deeply entrenched and will drive interest rates down. But over time, the Treasury will issue more debt and yields will rise again. We are currently in a countercurrent.”

Jeanna Smialek reporting contributed.