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On Thursday, investors around the world sold stocks and bonds as US borrowing costs reached a 16-year high. This upward trend followed stronger-than-expected job figures, increasing expectations of further interest rate hikes by the Federal Reserve. Europe’s Stoxx 600 index registered its largest one-day drop since March, closing down 2.3%. Similarly, the yield on the two-year US Treasury note, which reflects interest rate expectations, reached its highest level since 2007. ADP Research Institute’s data revealed that the US added 497,000 private sector jobs last month, more than double economists’ predictions and the largest increase in over a year. Allianz’s bond fund portfolio manager, Mike Riddell, warned that the global economy would eventually suffer and that the severity would correspond to the magnitude of the interest rate hikes.
As investors sold off stocks and bonds, pushing up yields, the two-year US Treasury note yield increased to 5.12%, while the benchmark 10-year yield reached 4.08%. On Wall Street, the S&P 500 and the Nasdaq Composite both experienced over a 1% drop initially but ended 0.8% lower. The Vix volatility index, known as “Wall Street’s fear gauge,” hit a high of 17.1 as investors worried that prolonged high borrowing costs would negatively impact the US economy. London’s FTSE 100 dropped 2.2%, and Hong Kong’s Hang Seng index fell 3%. Two-year German debt yields rose 0.07 percentage points to 3.36%, while two-year UK Gilts reached 5.56%, their highest level since 2008.
Lorie Logan, president of the Dallas Fed, urged an immediate resumption of interest rate hikes. She emphasized the need to restore price stability and warned that a failure to do so would require even more drastic measures later on. The Federal Open Market Committee’s minutes from the June meeting revealed that “almost all” officials believed additional increases were appropriate.
Despite the Federal Reserve’s interest rate hikes, the US labor market has remained remarkably strong. Thursday’s private sector employment data showed significant growth in the hospitality, leisure, construction, and transportation sectors. US rate strategist at BMO Capital Markets, Ben Jeffery, described the hiring data as “very, very strong,” stating that it would not deter the Federal Reserve from proceeding with the scheduled rate hike at the end of the month. In contrast, the government’s data is expected to reveal a slowdown in hiring growth for June.
Economists surveyed by Bloomberg predict that the labor department will report 200,000 job additions last month, down from May’s 339,000. However, the median forecast has consistently underestimated jobs data for the past 14 months.
Additional reporting by Taylor Nicole Rogers and Colby Smith in New York
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