Market report: Tinkering with treasuries calms bond and equity markets
Susannah Streeter, chief investment strategist, Wealth Club: “Trump’s tinkering with Treasuries has calmed bond and equity markets, for now, but fundamental pressures remain, with the US national debt reaching record levels and inflationary pressures still bubbling. Indices in Asia have clawed back some losses, but London’s FTSE 100 is flat as investors adopt a wait-and-see mode to assess how successfully this operation can calm nerves.
The major Treasury buyback intervention was launched after a feverish jump in long-dated debt yields, which was making the US debt mountain even more expensive to maintain. It was also threatening to push up the price of borrowing for companies, given how loans are linked to bond market movements. America’s national debt has more than doubled in a decade to reach $40 trillion dollars, just as the war with Iran has pushed up energy costs and threatens to spill over into knock-on price rises for goods and services. Brent crude, the benchmark, is still hovering around $91 a barrel as the Middle East situation remains at a stalemate.
So, the Treasury Department will at least double the size of its liquidity-support buyback operations for longer-dated debt from $2bn to $4bn per operation, between September 9 and November 4. The move has helped settle nerves, with the 30-year Treasury yield easing back to around 5.18%, after hitting a 19-year high of 5.34% earlier this week, while the 10-year yield has also pulled back.
But this could prove to be a sticking plaster which could be rapidly ripped off, given that bond vigilantes are on such high alert. The Treasury says the move is designed to provide greater liquidity support to the longer end of the market, and that can help dampen volatility and bring borrowing costs down in the short term. But it does not change the fundamental picture of rising government debt, persistent deficits and inflationary pressures.
And the latest minutes from the Fed show increasing wariness about those inflation risks. Several policymakers indicated they were prepared to raise rates if inflation fails to move down towards the 2% target, with many saying higher borrowing costs could ultimately be needed to prevent price pressures becoming entrenched. They are particularly concerned about energy prices and developments in the Middle East, while there are also worries that the huge investment boom in AI could keep inflation elevated through higher demand for chips, electricity and other infrastructure. But the same Fed minutes showed risks to employment and growth are viewed as being skewed to the downside. And the latest jobs figures will reinforce this concern, which is why policymakers may resist slamming on the brakes and opting for immediate rate hikes, given the weakening US labour market, with payrolls falling unexpectedly by 23,000 in July. So the Fed is caught between a rock and a hard place, with inflation risks picking up just as the labour market is weakening. The spectre of stagflation is hovering, with weaker growth, a softer jobs market, high government borrowing and renewed inflationary pressures.
JD Sports is offering another glimpse of the darkening clouds gathering over the US economy, with American shoppers looking considerably more cautious. The sneaker is fast becoming a canary in the coal mine for confidence. Like-for-like sales fell by 6.8% in North America, which accounts for 35% of JD sales, with weaker demand for the latest must-have footwear. More consumers are resisting the lure of hyped brands, which is not surprising when the jobs market is weakening and inflation is still such a concern. Consumers may still be spending, but they are becoming more selective about discretionary purchases, particularly when household budgets are already under pressure. However, the UK market showed more resilience, with like-for-like sales up 0.8%, while Asia Pacific continued to perform strongly. Inventory remains well controlled, with JD not sitting on piles of unsold goods, and the company remains in a net cash position before leases, giving it some protection while trading conditions remain difficult.
The cooling jobs market has created a highly difficult environment to navigate for recruiter Hays, given that employers are reluctant to commit to permanent hires and candidates remain cautious about making career moves. Although it’s like wading through mud, Hays is making progress. The headline statutory loss of £54.5 million looks ugly, but it masks an underlying improvement in the business. Strip out exceptional charges, and operating profit rose 3% like-for-like to £48.6m, slightly ahead of expectations, despite an 8% fall in net fees. It appears that Hays is making more money from a smaller pool of recruitment activity, suggesting the restructuring programme is beginning to have an impact. However, the underlying demand picture remains weak, with figures from the ONS out this week showing vacancies have fallen to the lowest level in five years. Permanent recruitment, traditionally a higher-margin part of the business, was particularly subdued, with fees down 12%, while temporary and contracting held up better, falling 5%. With economic uncertainty high and borrowing costs still elevated, employers are opting for flexibility, using contractors and temporary workers rather than locking themselves into additional headcount.”