(March 5): A renewed spike in oil prices combined with data showing labour-market resilience lifted Treasury yields as stocks fell amid reduced odds of Federal Reserve rate cuts.
The slide in bonds put two-year yields on pace for their biggest four-day surge since May as higher energy costs fuel inflation worries. Brent topped US$83 as the war in the Middle East disrupted flows to key buyers. The S&P 500 lost traction after a rally in the previous session.
Markets have been rocked by the Iran conflict, which is entering its sixth day with no immediate prospect of a resolution in sight. The war has boosted oil, gas, and product prices, lifting freight rates, and spawning an ever-widening wave of disruption for producers, as well as importing nations.
Traders have dialled back expectations for Fed cuts as inflation expectations build. Swaps markets are currently pricing in about 35 basis points (bps) of rate cuts by year-end, compared with 60bps at the end of last week.
On the eve of the US payrolls report, data showed jobless claims held steady, settling near some of the lowest levels seen in the last year and sending a stronger signal that the labor market continues to operate in a low-firing environment.
“From here, we anticipate that, in the setup for tomorrow’s payrolls report, the market will take its cues from moves in the energy sector and any challenge to the stability seen in risk assets,” said Ian Lyngen at BMO Capital Markets.
See also: Stocks rise amid economic surprise as oil whipsaws
Assuming the conflict is resolved over the coming weeks, our sense is that this spike in prices will prove to be transitory with Brent oil trading back down to the forward curve strip price of around US$65 a barrel, according to Chris Senyek at Wolfe Research.
“If the equilibrium for oil settles in higher, there is clearly still upward pressure on the 10-year yield,” he said.
Stocks
See also: US stocks rebound as jobs, services data outweigh Iran concerns
- The S&P 500 fell 0.2% as of 10.06am New York time
- The Nasdaq 100 rose 0.1%
- The Dow Jones Industrial Average fell 0.8%
Bonds
- The yield on 10-year Treasuries advanced three basis points to 4.12%
- Germany’s 10-year yield advanced eight basis points to 2.83%
- Britain’s 10-year yield advanced seven basis points to 4.51%
Commodities
- West Texas Intermediate crude rose 4.4% to US$77.98 a barrel
- Spot gold fell 0.9% to US$5,091.87 an ounce
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