Stocks get hammered in response to jobs report

The slide in the world’s biggest bond market deepened and stocks fell ahead of the U.S. jobs report, which is expected to provide clues on the outlook for the Federal Reserve’s next steps.

In late trading, Amazon.com climbed after a bullish revenue forecast, while traders awaited results from Apple.

Longer-dated Treasuries are now set for their worst week of 2023 amid signs of unexpected economic strength and concern over a widening budget deficit.

A report Thursday underscored resilient demand for workers, while separate numbers showed labor productivity climbed, helping to offset rising labor costs.

Those figures preceded the government’s employment data – forecast to show the U.S. added 200,000 jobs in July.

While that would be the weakest print since the end of 2020, it’s still a strong advance historically.

“The good news is that almost everyone agrees that an imminent recession isn’t very likely,” said Ed Yardeni, founder of his namesake research firm.

“That reduces the downside concerns about corporate earnings, but it increases the downside potential for the stock market’s valuation multiple if the bond yield continues to rise.”

The S&P 500 dropped for a third straight day. Tech megacaps, which bore the brunt of the recent selling in equities, outperformed.

Treasury 30-year yields hit 4.3%, extending a three-day surge to about 30 basis points.

The dollar was little changed. The pound wavered as the Bank of England warned its fight against inflation may require tighter borrowing conditions for an extended period.

A survey conducted by 22V Research shows that investors expect strong employment and weak wage inflation.

Roughly 65% of respondents are betting payrolls will be greater than consensus.

Meantime, 55% expect average hourly earnings to trail estimates – which helps explain why they also expect the equity-market reaction to be muted, the firm noted.

To Jason Draho at UBS Global Wealth Management, markets actually may be listless for the next month in the absence of any significant catalyst and after a strong run.

“Markets are already pricing in a soft landing, and increasingly with the belief that relatively little growth pain is required for inflation to gradually return to 2%,” Draho noted.

“The markets are vulnerable to any signs that the economy, with the Fed’s steering, is at risk of not sticking to that soft landing.”

Meantime, rate options traders are paying through the nose for protection against further increases in long-maturity Treasury yields.

A metric that compares demand for bearish put options to demand for bullish call options shows the widest divergence since September for options on CME Group’s U.S. Treasury bond Futures contract, which currently tracks a bond that matures in 2039.

The gaps are less extreme for options on shorter-maturity Treasury futures.

The steepening of the yield curve extended a trend since the Bank of Japan surprised markets last week with a policy tweak.

At 4.88%, two-year yields are 71 basis points higher than those on the 10-year note. That’s compared with a gap of 102 basis points two weeks ago.

“I remain wary of taking duration risks and still much prefer short duration bonds,” said Peter Boockvar, author of the Boock Report.

“This sovereign bond bubble continues to unwind and the problem now is higher rates just exacerbates the sovereign debt rise as interest expense starts to explode higher, everywhere, not just in the U.S., highlighted by the Fitch downgrade.”

Bill Ackman, founder of Pershing Square Capital Management, said he’s short 30-year Treasuries “in size” – as both a hedge against the impact of higher long-term rates on stocks and also as a stand-alone bet.

Bill Gross, the former chief investment officer of Pacific Investment Management noted he’s “overall bearish” on 10-year yields, while Berkshire Hathaway Chairman Warren Buffett told CNBC he had been buying Treasury bills and would likely continue.

Elsewhere, oil rose after Saudi Arabia prolonged its unilateral production cut by another month and hinted that deeper reductions may be on the way.