Investors Prepare for Impact: Stocks and Bonds Drop Ahead of US Jobs Report

Stocks and bonds dropped as investors waited for the upcoming US jobs report. Opinions are mixed on how the market will react, with a survey showing no clear consensus. The European Central Bank (ECB) raised its inflation forecasts while also cutting interest rates, affecting global bond markets.

Key Points

1. Market Overview:

• Stocks are down from recent highs as traders are cautious ahead of the US jobs report.
• Investors are unsure about the market’s direction: some expect a “risk-off” move, others a “risk-on,” while some predict little change.

2. US Economic Data:

• Recent data showed jobless claims were higher than expected, labor costs increased less than reported, and the trade deficit grew.
• The upcoming report is expected to show the US added 185,000 jobs in May, with unemployment remaining steady.
• A slowdown in the job market could ease inflation but may pose risks if it leads to broader economic weakness.

3. Stock Market Movements:

• The S&P 500 saw a slight drop after hitting record highs in 2024.
• Antitrust investigations into Microsoft and Nvidia over AI dominance are ongoing.
• GameStop’s stock surged as Keith Gill, aka “Roaring Kitty,” announced a YouTube stream.

4. Bond Market:

• US 10-year Treasury yields rose slightly to 4.28%.
• Swap markets are betting on the Federal Reserve cutting rates in November, with another possible reduction in December.
• European bond yields rose, with Germany’s 10-year bonds climbing to 2.55%.

5. Investor Sentiment:

• Investors are torn between signs of economic slowdown and potential rate cuts.
• Moderating but positive growth is seen as ideal for stocks, but the reason behind rate cuts matters.

6. Stock Fragility:

• Stock fragility, or the sensitivity of stock prices to volatility, is nearing a 30-year high for the largest S&P 500 companies. A major issue in one of these companies could impact the broader market.

7. European Central Bank (ECB):

• The ECB cut interest rates but also increased inflation forecasts.
• This “hawkish ease” suggests the ECB will keep rates high to control inflation, despite lowering them temporarily.
• Bond traders are now less confident about further rate cuts this year.

Corporate Highlights:

• The Bank of Canada’s decision to ease monetary policy and softer US economic data have led bond traders to expect more rate cuts soon.

Market Summary:

• US Stocks: Slight decline from record highs.
• Bonds: US 10-year yields up; European bonds also rising.
• Key Events: Anticipation of US jobs report and ECB’s inflation forecast.