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Authors: David Randall, Saqib Iqbal Ahmed, and Lewis Krauskopf
New York (Reuters)-July employment data was unexpectedly strong, providing support to investors who believe U.S. Treasury yields will rise for the rest of the year. This may put pressure on the stock market, which has already risen. Push the stock market to a record high.
After Labor Department data showed that the US economy added 943,000 jobs last month, the benchmark 10-year US Treasury bond yield was about 1.29% on Friday, the highest level since July 27. Analysts surveyed by Reuters predict that the number of jobs will increase by 870,000.
Some investors believe that strong employment data may support the Fed’s view that it faces rising inflation and strong growth, and may need to relax its ultra-loose monetary policy earlier than expected. Such results may push up yields while weakening growth stocks and other areas of the market.
However, this view is complicated by concerns that the increasing number of COVID-19 cases across the United States may put pressure on economic growth, and the Fed’s insistence that the current surge in inflation is temporary.
In any case, these data may intensify investors’ attention to the central bank seminar held in Jackson Hole, Wyoming this month. This may also increase the risk of the Fed’s policy meeting next month, as investors weigh when the central bank may outline its plan to reduce monthly asset purchases.
Simon Harvey, senior foreign exchange market analyst at Monex Europe, said that the data “provides a certain direction for the market. It makes the upcoming Jackson Hole incident and the Fed incident in September a reality.”
One of the effects of rising yields may be a drag on technology stocks and growth stocks with higher valuations, as rising interest rates erode the value of long-term cash flow. Since yields started to fall in March, these stocks have risen, helping to boost the market. For example, only five technology or technology-related names-Apple (NASDAQ:), Microsoft (NASDAQ:), Amazon (NASDAQ:), Google parent company Alphabet (NASDAQ:) and Facebook (NASDAQ:)-accounted for more than 22% of the weight.
Higher yields may also increase the attractiveness of so-called value stocks-stocks of banks, energy companies and other economically sensitive companies soared earlier this year but have been struggling in the past few months.
The Russell 1000 growth index has risen by about 18% since the end of March, while its corresponding value index has risen by about 6%.
Art Hogan, chief market strategist at National Securities, said that strong economic data pushing up yields may pave the way for investors to shift from growth companies to cyclical companies that are more economically sensitive.
However, strong data may make dollar-denominated assets more attractive to investors seeking income, which may boost the dollar. A stronger dollar may be detrimental to US exporters because it reduces the competitiveness of their products abroad and at the same time damages the balance sheets of domestic multinational companies that must convert foreign income into dollars.
In Friday afternoon trading, the index rose 0.6%, which is expected to be the largest increase since mid-June.
Companies such as Goldman Sachs (NYSE:), Bank of America Global Research (BofA Global Research), and BlackRock say yields will rise to nearly 2% by the end of the year-if a strong economy pushes the Fed to relax earlier than expected Its ultra-loose monetary policy. Other institutions such as HSBC are calling for yields to be lower than current levels.
Capital Economics analysts said in a report released on Friday: “We believe that the recovery of long-term Treasury yields in the past week or so is a sign of the future.”
The company said: “We suspect that growth in the United States in the next few quarters will be quite strong, and the recent surge in inflation there will be much longer than most people expected.”