Stocks and bonds rallied on Friday, continuing a sharp reversal after new data on the health of the U.S. labor market capped a turbulent week for investors.
The 10-year Treasury yield, which underlies interest rates on everything from mortgages to business loans, fell 0.1 percentage point on Friday, another sharp decline for a market where daily moves are measured in hundredths of a point. Yields move in the opposite direction to prices.
A new report showed that the U.S. economy added fewer new jobs than expected in October, a sign of a cooling labor market that could reduce the need for the Federal Reserve to raise interest rates again as it aims to boost the economy to slow down to combat inflation.
That helped boost the stock market, which had seen a sell-off in recent months due to rising interest rates. The S&P 500 ended the week up nearly 6 percent, posting its best week of the year.
The Fed began raising its short-term interest rate in March last year, but recently investors have been fixated on longer-term market interest rates, which are determined by a variety of factors such as economic growth and inflation expectations, and not just the Fed’s policy decisions. Those long-term interest rates began rising in August, increasing concerns about the sustainability of the government’s $33 trillion debt pile, among other concerns.
Those concerns have somewhat dissipated this week. Investors welcomed Treasury plans to focus its borrowing on shorter-term debt, easing pressure on longer-term yields. Then Fed Chairman Jerome H. Powell appeared to calm investors’ nerves after the central bank kept interest rates steady for the second straight day. Weaker-than-expected job growth also suggested that the Fed’s efforts to slow the economy were having an effect.
“To me, the jobs report is undoubtedly positive,” said Ronald Temple, chief market strategist at Lazard. “I think it’s a really good signal to the Fed that they’re slowing down the economy and don’t need to raise rates again.”
The yield on 10-year government bonds fell 0.3 percentage points over the week to just under 4.6 percent, the sharpest decline since the banking turmoil in March. Nevertheless, the return is still more than half a percentage point higher than at the beginning of August.
This week’s drop in yields sparked a broad rally in stock markets. The Russell 2000 index of smaller companies, which are more sensitive to the ups and downs of the economy, rose 2.8 percent on Friday. That index had fallen over 18 percent in recent months but rebounded by about 8 percent this week, the biggest one-week increase since the early pandemic recovery in 2020.
Still, some investors warned that the market reaction may not reflect such a rosy story. The unemployment rate rose to 3.9 percent in October from 3.8 percent the previous month, while the number of people working or actively looking for work fell slightly.
“What concerns me is that such increases in the unemployment rate tend to trend higher,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “That’s what I’m watching closely. Otherwise, the decline in employment looks orderly.”
After the jobs report, investors reduced the likelihood that the Fed would raise interest rates at its next meeting in December and raised expectations for rate cuts next year, a sign that they believed the Fed was done raising rates and that doing so would further slow the economy.
Mr. Powell, the Fed chairman, said on Wednesday that the recent rise in long-term interest rates, which is also raising borrowing costs and slowing the economy, would need to be “sustained” for it to help convince policymakers to do so not to raise their key interest rate again.
But if the recent bond market turnaround continues and yields continue to fall, then it could “ironically” increase the likelihood that the Fed will raise its interest rate in December, said Mark Dowding, chief investment officer at asset manager BlueBay, because it will Reduce borrowing costs and ease the burden on the economy.
And while a slowing economy would likely lead to lower longer-term interest rates over time, worries about who will buy the flood of debt the U.S. government will issue could push 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 the slowing economy, which is now stalled and will drive down yields. But over time, the Treasury will issue more debt and yields will rise again. We are currently in a countercurrent.”
Jeanna Smialek contributed reporting.