While you were sleeping: More clouds on rates

Thursday 7th May 2015

US stocks, bonds, and the dollar slid after Federal Reserve Chair Janet Yellen warned valuations were quite high, while weaker than expected private jobs data added to recent data suggesting the central bank might not lift interest rates as soon as thought.

Wall Street’s decline deepened after Yellen’s comments on a panel in Washington. In late trading in New York, the Dow Jones Industrial Average fell 0.78 percent, the Standard & Poor’s 500 Index declined 0.71 percent, while the Nasdaq Composite Index shed 0.78 percent.

Declines in shares of Microsoft and those of Pfizer, last down 2.5 percent and 2.3 percent respectively, led the slide in the Dow.

“I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Yellen also warned that bond yields “could see a sharp jump” when the Fed raises its benchmark interest rate, according to Bloomberg.

US Treasuries declined, pushing yields on the 30 year bond eight basis points higher to 2.99 percent.

Both the Fed chief’s comments and a weaker than expected private jobs report increased the focus on Friday’s government payrolls data amid persistent signs that the pace of US growth is weakening.

"The data pile onto recent evidence suggesting increased odds that, by the time the June policy meeting rolls around, the hope of a great spring rebound in real growth will have faded," Steve Blitz, chief economist at ITG Investment Research in New York, told Reuters.

On Wednesday an ADP Research Institute report showed US companies hired 169,000 workers in April, short of the 200,000 economists had expected.

"The ADP is an early signal that the nonfarm payrolls may disappoint to the downside," Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York, told Reuters. "That will certainly put the Fed on hold.”

In Europe, the Stoxx 600 Index finished the session with a 0.6 percent decline from the previous close. The UK’s FTSE 100 Index rose 0.1 percent, while both France’s CAC 40 Index and Germany’s DAX gained 0.2 percent.

In Greece, the ASE Index rallied 2.9 percent. The country is facing a key deadline on debt repayment on May 12, and the pace of progress in negotiations with its international lenders appears glacial.

Meanwhile, eurozone bonds fell amid concern about rising oil prices, which hit their highest level this year, and the uncertainty surrounding a Greek deal. Yields on German 10 year bunds rose to touch 0.60 percent, the highest since December 29.

"If the rise in yield resulting from dumping Bunds is compounded into other G10 government bonds by possible signs of oil driven reflation currents, then stocks will have to take notice," City Index chief markets strategist Ashraf Laidi in London, told Reuters.

BusinessDesk.co.nz

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