Bond Yields Advance With Resilient Economic Activity

July 10, 2023

Market Data as of Week Ending: 7/7/2023 unless noted otherwise

Major U.S. stock indexes declined lower in the first week of a new quarter as economic data continues to support additional policy rate hikes. Minutes from the June Fed meeting were released on Monday and revealed that several voting members would have agreed to a policy rate hike in June based on better-than-expected economic activity. Value stocks outperformed their growth counterparts, but size was not a relevant factor as there was no clear pattern. Ten of the eleven major economic sectors closed the week down, with real estate being the only sector with a small gain. There was no clear pattern across defensive or cyclicals, as health care and materials were the two worst performing sectors. Both developed foreign and emerging markets stocks declined with mixed results relative to domestic equities.

U.S. Treasury yields continued to drift higher as the bond market is no longer expecting the Fed to pivot and cut rates until May of next year. The yield on the 2-year note ended the week at 4.94%, while the 10-year Treasury yield finished at 4.06%. All segments finished the week lower across the curve as high yield corporate bonds fared the best while long term government bonds underperformed. Yields for investment grade corporate bonds and high yield bonds were mixed as they ended the week at 5.7% and 8.8%, respectively.

Despite it being a holiday-shortened week, it was a busy week for economic data, including minutes from the Fed and hawkish commentary that supports additional policy rate increases. Survey data from ISM and S&P Global showed a consistent theme of strength in the services sector more than offsetting weakness in manufacturing. The Composite PMI (includes both services and manufacturing) from S&P Global came in lower than expected but still points toward robust growth at 53.2. The ADP employment report came in much higher than expected, with nearly 500,000 jobs created in June, the most since February 2022. The official government jobs report was more modest and lower than expected, with 209,000 new jobs in June, but the unemployment rate fell to 3.6%, down from 3.7% in May. Average hourly earnings were better than expected and remained robust at 4.4%. Global central bankers in Europe are also hawkish, as ECB President Christine Lagarde noted that policymakers still have work to do to reduce inflation.

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