Equities gave up some of their post-payroll gains from Friday as bonds were hit, pushing up interest rates as the market prices in higher inflation expectations.
While stocks were enthused about last week’s “Goldilocks” jobs report — a bounce back from March’s weakness but with downward revisions to prior months likely to keep Federal Reserve rate hikes at bay — bond traders seem to be growing increasingly concerned about the specter of a rebound in inflation later this year.
As a result, long-term yields are lifting off already; leaving the Fed behind.
In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 lost 0.5%, the Nasdaq lost 0.2%, and the Russell 2000 bucked the trend to gain 0.1%.
The bond market weakness pushed the 30-year Treasury yield above the 3% benchmark for the first time since November. You can see this in the chart of the iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) below.
The chatter across trading desks remains focused on crowded “Euro-QE” trades in core eurozone bonds; positions that are now getting hit hard as European economic data starts to recover.
Greece remained in the headlines with Athens reportedly set to make a €750 million bond payment to the International Monetary Fund tomorrow. The country appears to have enough cash to make it through the month, raising the stakes for ongoing bailout negotiations with the European establishment. There was no breakthrough at today’s meeting of Eurogroup finance ministers, which was largely expected as major differences remain on issues including pension and labor market reforms.
And finally, China’s Shanghai Composite gained 3% after the People’s Bank of China unleashed additional monetary policy stimulus by cutting its benchmark interest rates by 0.25% — the third such cut in the last six months.
Yet it’s the path and timing of any interest rate hikes from the Federal Reserve that remains the primary catalyst in the market. We’ll get new clues this week as data on retail sales, job openings and producer price inflation are released.
In response, and cognizant of the turmoil in bonds, I’m recommending a cautious stance to my clients with a focus on the VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX), a leveraged bet on higher volatility in the days to come, which gained 3.7% for Edge subscribers today.
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