10-Year Treasury Yield Rises on U.S. Jobs Report, U.S. Inflation Could Rise
Last Week Review
The 10-year yield increased 0.20% last week with higher-than-expected U.S. jobs gains in March, and the two-year yield rose as well. Global equities fell 0.9%, with U.S. equities declining 1.1% and non-U.S. developed equities falling 1.2%. Natural resources equities gained 2.6% with rising tensions in the Middle East.
U.S. March Job Gains Surpass Expectations
The U.S. added 303,000 jobs in March, well above expectations of 200,000, according to the jobs report released on Friday. The unemployment rate ticked down to 3.8% from 3.9% in February while labor force participation increased. Average hourly earnings increased 4.1% year-over-year, in line with expectations, from 4.3% in February. On Friday after the release of the report, the 10-year Treasury yield rose 0.09% and markets priced in a lower probability of a June Fed rate cut. U.S. equities gained about 1%.
U.S. Manufacturing Shows Strength
The global manufacturing Purchasing Managers’ Index is now showing expansion after spending all of 2023 in contraction. The index last week showed March U.S. manufacturing was stronger than expected, expanding for the first time since late 2022. The prices-paid component of manufacturing was high, adding to concern that strong growth may reignite inflation. We think solid but softer-than-expected services activity tempered those fears, and the prices-paid component fell.
Oil Prices Gain After Attack on Iranian Consulate
Oil prices gained about 5% last week because of increased Middle East tensions. Leaders from Iran and Hezbollah warned of retaliation against Israel after they accused Israel of attacking an Iranian consulate in Syria last Monday. Higher oil prices likely reflect the rising risk that the Middle East could broaden and more acutely disrupt global oil supply.
European Inflation Eases
Eurozone flash Consumer Price Index inflation declined despite sticky prices for services. Minutes from the European Central Bank (ECB) meeting underscored its base case for a June rate cut. Futures markets; are pricing in an 87% chance of an ECB rate cut in June versus 45% for the Federal Reserve.
This Week's Preview
Continued U.S. Inflation Surprises Could Delay Expected Fed Rate Cuts
The U.S. Consumer Price Index report for March is scheduled for release on Wednesday, after inflation has been higher than expected so far this year. Inflation is expected to rise 3.4% year-over-year in March from 3.2% in February. Core inflation, which excludes more volatile food and energy prices, is projected to decelerate slightly to 3.7%. Stickier-than-expected inflation could delay market expectations for Fed rate cuts.
European Central Bank Expected to Maintain Rate
The European Central Bank is expected to hold its policy rate steady when it announces policy decisions on Thursday. We think investors will look for commentary surrounding rate cuts later this year.
U.S. Financial Companies to Report First-Quarter Earnings
JPMorgan (JPM), Wells Fargo (WFC) and BlackRock (BLK) are scheduled to report earnings on Friday. First quarter aggregate earnings of companies in the S&P 500 Index are scheduled to rise 3% year-over-year on a 3.5% sales increase. Sector performance may be mixed with earnings for communication services, consumer discretionary, technology and utilities expected rise more than 10%. Earnings of financial and real estate companies also are expected to grow. Earnings of the remaining sectors are projected to fall, a couple more than 10%.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of April 7, 2024.
Resilient U.S. Economy Sparks Inflation, Fed Questions
A strong labor market, low unemployment and higher wages may push back the timing of the Federal Reserve’s first rate cut this year, especially with inflation running above expectations so far in 2024.
FEDERAL FUNDS FUTURES
Federal funds futures are contracts used to hedge short-term interest rate risk. They reflect the market's insight on the future course of the Federal Reserve's policy rate.
PURCHASING MANAGERS INDEX (PMI)
The Purchasing Managers' Index is a survey of purchasing and supply executives on business activity for services and manufacturing. The reports provide insight on the direction of the economy.
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