Treasury yields rise as data points to resilient US economy

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Treasury yields climbed on Thursday as fresh data pointed to further resilience in the US economy, raising traders’ expectations that the Federal Reserve will raise interest rates to tame inflation.

The yield on the policy-sensitive two-year US government debt added 0.15 percentage points to 4.87 per cent after data showed the economy grew more in the first quarter of 2023 than originally calculated.

New applications for US unemployment aid, a proxy for job cuts, came in below economists’ expectations in a sign of continued labour market strength. The yield on the benchmark 10-year note gained 0.12 percentage points to 3.84 per cent. Bond yields rise as prices fall.

The data “is further confirmation that the economy is in stronger shape than many expected”, said Carol Schleif, chief investment officer at BMO Family Office, a wealth management provider. She added that it “makes the central bank more likely to stick to its ‘higher for longer’ policy”.

A day earlier, Fed chair Jay Powell joined the annual European Central Bank meeting in Portugal and repeated that US interest rates would probably go higher, without ruling out the possibility of two consecutive rises.

Wall Street’s benchmark S&P 500 and the tech-focused Nasdaq Composite were both flat at the opening bell. Bank stocks rallied as large US banks passed the Fed’s annual stress test, proving they have enough capital to withstand a sharp economic downturn.

Bank of America rose 1.5 per cent, while Wells Fargo added 2.4 per cent and JPMorgan Chase gained 1.4 per cent. The KBW Banking index rose 1.4 per cent.

Meanwhile, the pan-European Stoxx 600 rose 0.1 per cent, lifted by gains in consumer cyclicals, while the Cac 40 added 0.5 per cent. London’s FTSE 100 was down 0.4 per cent.

Investors turned to retail-focused stocks. Shares of H&M jumped as much as 19 per cent after the Sweden-based fashion retailer said its second-quarter profits beat estimates, even as inflation and high borrowing costs hit consumers this year.

Germany’s Dax was flat after the latest inflation data showed that the rate of price growth in the eurozone’s largest economy rose to 6.8 per cent in June on an EU harmonised basis, slightly higher than the 6.7 per cent predicted by a consensus of economists polled by Reuters.

Yet investors took heart after Spanish inflation fell to 1.6 per cent year on year in June, making it the first of the eurozone’s large economies to record annual price rises below the ECB’s 2 per cent target since the Ukraine war.

The eurozone-wide data published on Friday is expected to show that headline inflation slowed, but the closely watched core figure, which excludes volatile food and energy prices, edged up in a sign that the ECB’s tightening campaign could extend for longer.

In Asia, equities edged lower, with Hong Kong’s Hang Seng index falling 1.3 per cent, while China’s CSI 300 dropped 0.5 per cent and Japan’s Topix lost 0.1 per cent.