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(CEP News) - Treasuries initially rallied to four-month highs following an unexpectedly soft U.S. employment report, but later sold off as investors took profits and reallocated cash into equity markets.
The U.S. Bureau of Labor Statistics said the unemployment rate rose to 6.1% in August from the previous 5.7% level. They also said the economy shed 84k jobs in the month against the -75k consensus. "More and more, the job market is feeling the difficulties in various sectors of the U.S. economy. There is a possibility that sharp job losses could continue until next year," said Francis Genereux, senior economist at Desjardins Securities. U.S. 10-year yields initially fell to 3.54% after the release of the report but rebounded 10 basis points on profit-taking. "The people who were long took the rally as an opportunity to sell," said Carl Lantz, interest rate strategist at Credit Suisse. "You also have some people starting to take short positions. Now there's a lot of hand wringing about rate cuts." Fed fund futures are pricing in a 12% chance of a rate cut by year-end. U.S. two-year yields are up 4.8 bps to 2.22%, with five-year yields up 4.0 bps to 2.89%, 10-year yields up 2.0 bps to 3.64% and 30-year yields up 0.8 bps to 4.27%. The Eurodollar March 09 contract is down 3.5 ticks to 97.14. The yield curve is flatter, with the 10/2-year spread down 2.6 bps to 142.06 bps. The jobs report also stung stock markets and the S&P 500 fell as much as 1.9% or 19.5 points. The sell-off in Treasuries appeared to be a reverse flight to quality. Toronto's S&P/TSX composite index is down 121 points to 12693, the Dow Jones industrial average is down one point to 11187, the S&P 500 is down four points to 1233 and the Nasdaq is down 13 points to 2246. European stock markets closed with the Eurostoxx down 58 points to 2754, the UK FTSE 100 down 121 points to 5241 and the German DAX down 152 points to 6127. In the foreign exchange market, the U.S. dollar was resilient and remains higher on most crosses despite the employment report. The exception was the Canadian dollar, which is in the midst of a strong session following a better-than-expected employment report. Statistics Canada said the economy added 15,200 in August and the unemployment rate held at 6.1%. Economists were expecting only 10,000 jobs and a rise in unemployment to 6.2%. "Although this was not a gangbuster increase in total employment, the fact that all the net gain in employment was due to an increase in full time jobs and mostly in goods producing industries supports the view that the fundamentals of Canadian economy are still quite solid," wrote John Clinkard, chief economist at Deutsche Bank Canada in a client note. The Canadian dollar is up 0.0035 to 0.9380 against the U.S. dollar (1.0661 USD/CAD) and up 0.32 to 100.44 against the yen. The U.S. dollar is down 0.01 to 107.07 against the yen and the Dollar Index is up 0.249 to 78.859. The euro is down 0.0087 to 1.4238 against the U.S. dollar, down 0.0143 to 1.5178 against the Canadian dollar, down 0.0020 to 0.8081 against the pound sterling and is lower by 0.93 to 152.46 against the yen. The pound sterling is down 0.0065 to 1.7620 against the U.S. dollar and down 0.0129 to 1.8787 against the Canadian dollar. WTI crude oil is down $2.18 to $105.71. The front month gold contract at the Chicago Board of Trade is up $1.90 to $805.20 per ounce. All data taken at 12:28 p.m. EDT. By Adam Button,
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, edited by Nancy Girgis,
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