Recession Concerns Spur Another Volatile Rates Session

Rates markets calm after opening in a panic. Swap rates opened the session down another 10+bps after Friday’s 18-29bp rate decline, as markets continued to fear that the Fed erred by opting out of a rate cut at last week’s FOMC meeting. Friday’s nonfarm payrolls miss and the rise in unemployment spurred broader concerns about a “hard landing,” leading to rumors of a potential emergency FOMC meeting being circulated. However, the volatile rates session flipped its head following stronger than expected services sector data, as concerns about a flailing economy eased. The short-end and belly of the yield curve (up to 7-year tenors) ended 1-4bps higher while longer tenors closed slightly lower.

Service sector flips back to growth territory. The ISM services index for July hit 51.4, above the 51 estimate and climbing back into growth territory after June’s reading showed the fastest monthly contraction in 4 years. The reading was viewed positively after last week’s data showed a weak labor market, prompting recessionary fears that have taken a recent toll on equity markets. Deputy chief north America economist at Capital Economics Stephen Brown commented, “Ultimately, the rebound in the ISM services index in July is hardly consistent with the economy or labor market falling over a cliff, as many seem to fear…”

Yen appreciation continues to plague US equities. Equities plummeted today for several reasons, including broad concerns about an imminent US recession. The Bank of Japan’s (BOJ) recent end of negative rates is also contributing, as BOJ rate hikes have seen the yen rise to ~145 per dollar from 162 per dollar a month ago. The yen’s appreciation has forced market participants to unwind their “carry trades,” where they could previously borrow cheap yen to buy risky assets in other nations, such as the US. CFTC data shows that hedge funds and other speculators were holding more than 180,000 contracts (worth ~$14B) betting on a weaker yen at the start of July versus ~$6 billion last week.