A quick reversal in bonds and a rally in stocks caps a wild week for the markets

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

The 10-year government bond yield, which supports interest rates on everything from mortgages to business loans, fell 0.1 percentage point on Friday, another big decline for a market where daily moves are measured in hundreds of a point. Returns move inversely with prices.

A new report showed that the US economy added fewer jobs than expected in October, a sign of a slowing labor market that could reduce the need for the Federal Reserve to raise its key interest rate again as it aims to slow the economy to fight inflation. .

This helped lift the stock market, which had been selling off as interest rates rose in recent months. The S&P 500 ended the week up nearly 6%, marking its best week of the year.

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

These concerns were somewhat dispelled this week. Investors welcomed the Treasury’s plans to shift its borrowing towards short-term debt, relieving pressure on longer-term yields. Then, Fed Chairman Jerome Powell appeared to calm investors’ nerves after the central bank held interest rates steady for the second straight meeting. Weaker-than-expected job growth also suggests the Fed’s efforts to slow the economy are having an impact.

“For me, the jobs report is definitely positive,” said Ronald Temple, chief market strategist at Lazard. “I think it’s a really good signal to the Fed that they are slowing the economy and that they don’t need to raise rates again.”

The yield on the 10-year Treasury note fell 0.3 percentage point during the week to just under 4.6 percent, its biggest drop since the banking turmoil in March. However, the yield is still more than half a percentage point higher than it was at the beginning of August.

This week’s decline in yields led to a broad rally in stock markets. The Russell 2000 index of small companies, more sensitive to the ebbs and flows of the economy, rose 2.8 percent on Friday. This indicator has fallen by more than 18 percent in recent months, but rose this week by almost 8 percent, the largest increase in a week since the early recovery from the epidemic in 2020.

However, some investors cautioned that the market reaction may not reflect such a rosy story. The unemployment rate rose to 3.9% in October, from 3.8% the previous month, while the number of people working or actively looking for work fell.

“What concerns me is that when we see such an increase in the unemployment rate, it tends to trend upward,” said Blerina Orochi, chief U.S. economist at T. Rowe Price. “This is what I am watching closely. Otherwise, the slowdown in hiring appears orderly.

After the jobs report, investors downplayed the likelihood of the Fed raising interest rates at its next meeting, in December, and offered expectations of lower interest rates next year, indicating that they believe the Fed is done raising interest rates and that The economy will recover. Continue to slow down.

Mr. Powell, the Fed chairman, said on Wednesday that the recent increase in long-term interest rates, which also raises borrowing costs and slows the economy, must be “sustained” to play a role in convincing policymakers not to do so. Raise the key interest rate again.

But if the recent reversal in the bond market continues and yields continue to fall, it “paradoxically” could make the Fed more likely to raise interest rates in December, because it will, said Mark Dowding, chief investment officer at BlueBay Asset Management. Reducing borrowing costs and easing restrictions on the economy.

While a slowing economy is expected to push down long-term interest rates over time, concerns about who will buy the flood of debt the US government is set to issue could push interest rates in the opposite direction.

“There are two opposing forces at work,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. “One is a slowdown in the economy, which is now entrenched and that will drive yields down. But over time, the Treasury will issue more debt and those yields will rise again. We are in a cross-current now.”

Jenna Smialek Contributed to reports.