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US Treasuries rallied across the board on softer jobs growth although wage growth continued to remain sticky. The 2Y yield was down 8bp and the 10Y yield fell 11bp. US Non-Farm Payrolls came at 187k for July, lower than the surveyed 200k and slightly higher than last month’s revised 183k print. The Unemployment Rate was at 3.5%, lower than the surveyed 3.6%. Average Hourly Earnings YoY was at 4.4%, higher than the surveyed 4.2%. The peak Fed Funds rate was unchanged at 5.42%. Fed officials Raphael Bostic (Atlanta Fed President, non-voting member) and Austan Goolsbee (Chicago Fed president, voting member) suggested that slower US employment gains mean the central bank may soon need to pivot to thinking about how long to hold rates at elevated levels. However, Fed Governor Michelle Bowman (voting member) said that they may need to raise rates further in order to fully restore price stability. US IG credit spreads were wider by 0.9bp and HY CDS spreads widened by 5bp. The S&P and Nasdaq were lower by 0.4-0.5%.
European equity markets ended higher. In credit markets, European main CDS spreads were 1.9bp tighter and Crossover CDS tightened 9.3bp. Asia ex-Japan CDS spreads tightened by 4.1bp. Asian equity markets have opened mixed this morning.
A Credit Default Swap (CDS) is a financial contract between two counterparties that allows an investor to “swap” or offset the credit risk with another investor. CDS acts like an insurance policy wherein the buyer makes regular payments to the seller to protect itself from an issuer default. In the event of a default, the buyer receives a payout, typically the face value of the bond or loan, from the seller of the CDS as per the agreement. CDS spreads are a commonly used metric to track the market-priced creditworthiness of an issuer. A widening (increase) in CDS spreads indicates a deterioration in creditworthiness and vice-versa. China Huarong’s CDS spreads have shot up massively with default risks rising.
On ‘Tough Week’ Leaving Bond Traders Girding for Another Key Stretch
Gennadiy Goldberg, head of US rates strategy at TD Securities
“From a long-term standpoint, yields are now at the most attractive levels in a very long time. What’s keeping investors away is the fear that they would get even better levels over the next three to six months”
Jack McIntyre, a portfolio manager at Brandywine Global
“It’s been a tough week. Bonds have just moved too much. Next week is going to be very interesting to see how those auctions go, because it could be a sell-the-rumor-buy-the-fact sort of thing”
On Fed’s Bowman saying more US rate hikes likely needed
“I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target… We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled… The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2 percent goal”
On Fired-Up Traders Getting Burned in ‘Everything Selloff’
Scott Rubner, an MD at Goldman Sachs
“If the ball starts going downhill, there is potential for a large downdraft given recent new longs. Fitch is the match, but it was already in motion”
Michael O’Rourke, chief market strategist at Jonestrading
“The market has priced in a lot of optimism and become too exuberant at a time of a still uncertain environment and economic deceleration… lot of hype in the system lately. The Fitch downgrade was an excuse to sell.”
Sonia Meskin, head of US macro at BNY Mellon Investment Management
“The market is not positioned for reacceleration or sticky core inflation, nor is it pricing in the tail risk of potential challenges to credit spreads should rates stay higher for longer”
On EM Stocks Having a Moment as Growth Bets Return
Ashish Chugh, money manager at Loomis Sayles
“The main drivers for equity performance will be a benign macro environment, especially in countries like India, Indonesia and Brazil, along with strong earnings growth”
Hasnain Malik, strategist at Tellimer
“If we really have seen a peak in US rates, then equities in the smaller, more distressed parts of EM should do well as foreign capital revisits — examples are Egypt, Nigeria, Pakistan and Turkey,”