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Market Update

Treasury curves invert amid strong job market report

July 11, 2022


Amid growing recessionary fears, a strong June jobs report and continued dollar strength offer a glimmer of economic hope in the U.S. Despite this news, concerns persist with recession indications from the U.S. Treasury and commodity markets.

Unemployment numbers

The U.S. gained 372,000 jobs in June, a number well above the 250,000 estimates, while unemployment remained at 3.6%. These numbers continue what has been a strong year for job growth despite weakness in other areas of the economy. Average hourly earnings increased by 0.3% from last month and are up 5.1% from last year, indicative that wage pressure is strong as inflation rises.

The 2-year and 10-year

Yield curves spiked throughout the week as the heavily watched 2-year U.S. Treasury rose and remained above the 10-year U.S. Treasury through the end of the week and Monday morning. Historically, when the 10-year U.S. Treasury has dipped below the 2-year U.S. Treasury for an extended period, this has preceded a recession. Inversions in the 70s, 80s, 90s, and early 2000s are examples of this phenomenon.

Graph showing the 10 year U.S. Treasury and 2-year U.S. Treasury spread
Short-term inversions are not necessarily strong indicators of recession, but prolonged periods of inversion may cause concern. Treasuries spike on Friday in response to the strong job market report, with the 10-year U.S. Treasury rate ending the week at 3.084% and the 2-year U.S. Treasury rate at 3.115%. The spread between the two reflects a continued inversion of the forward curve.

Commodity corrections

WTI crude oil fell to below $100/bbl on Tuesday for the first time since May. Although this may offer a sliver of hope for relief from high prices, investors are more concerned with how this might reflect consumer sentiment and hint at declining economic activity. Beyond oil, commodities across the board have seen a downturn in prices. This is reflected by the Bloomberg commodity index’s steady decline over the past few days. It could be seen as the market correcting itself or a result of tightening demand spurred by recessionary fears.

Foreign exchange

Dollar strength continues to be a theme in the foreign exchange market. With uncertainty around the economic environments abroad and a bolstered expected level of return on American investments driven by the rising Fed Funds rate, investors are flocking to the dollar as a safe haven.

Eyes are also turning to the EUR/USD exchange rate which is hovering at a 20-year low of around 1.02, approaching parity with the dollar.

The erosion of the Euro’s value may not only be driven by dollar strength but also fears related to recession and fuel availability, with Russia threatening to cut off the gas supply to Europe. The Euro zone’s fears of a recession are quantified by Sentix’s consumer confidence index. The index for the Eurozone fell to -26.4 from -15.8 in June. A Reuters poll had pointed to a July reading of -19.9. This bleak outlook is likely driven by the record high of 8.6% inflation in June in tandem with high gas prices and the 9% decrease in the value of the Euro compared to the dollar since the beginning of the year.

(Related insight: Read, "FX hedge execution: algorithmic trading considerations")

The week ahead

Investors will continue eyeing the EUR/USD exchange rate as it approaches parity. On Wednesday, the Bureau of Labor Statistics will release the highly anticipated inflation numbers for the month of June followed by retail sales on Friday. The release of this economic data could be telling of what the Fed’s next move will be.

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