STRONG JOBS REPORT SENDS BOND YIELDS HIGHER ON DIMINISHED HOPE FOR JULY RATE CUT -- DIVIDEND-PAYING STOCKS ARE LEADING TODAY'S MARKET RETREAT -- RISING YIELDS ARE BOOSTING BANKS AND FINANCIALS -- A STRONGER DOLLAR IS CAUSING PROFIT-TAKING IN GOLD
STRONGER THAN EXPECTED JOBS REPORT BOOSTS YIELDS...A increase of 224,000 jobs in June was much higher than expected, and may have diminished hopes for a July rate cut. That can be seen by rising bond yields today. The 10-Year Treasury yield is rising 11 basis points to 2.06%. The 2-year yield, which is more sensitive to Fed moves, is up a similar amount. That's causing profit-taking in stocks. The jump in bond yields, however, is taking a bigger toll on dividend-paying stocks like consumer staples, utilities, and REITs which are among the day's weakest sectors. The jump in yields is boosting the dollar which is causing profit-taking in gold and gold miners. That's weighing on materials. Rising yields, however, are boosting financial stocks, and banks in particular. Financials are the only sector in the black this morning. Banks are a big reason why.
Chart 1 shows the Financial Sector SPDR (XLF) rising this morning to the highest level in ten months. Its relative strength ratio (upper box) is still in a downtrend. But it has formed a bullish pattern of "rising bottoms" since late March (see up arrow); and may be nearing an upside breakout of its own. Financials are one of the few sectors that actually benefit from rising bond yields. That's especially true of banks which are also gaining.
Chart 2 shows the KBW Bank Index (BKX) trading higher as well this morning, and reaching the highest level in nearly two months. Its relative strength ratio (solid line) has been weak all year; but is starting to rise. Banks usually do better when bond yields are rising because they can charge higher rates for loans. The BKX rose above its 50 and 200-day moving averages last week, and has stayed above both new support lines. That's another sign that the technical outlook for banks is improving.
JOBS REPORT IS A SIGN OF STRENGTH... It may seem strange to see stocks selling off today on a strong jobs report which suggests that the U.S. economy (which is now the longest in history) is still doing pretty well. But it shows how much of recent bond and stock gains have been based on heightened expectations for a Fed rate cut this month (and maybe more later). That's like a patient being disappointed when the doctor tells him that he's getting better and doesn't need as much medicine. Most people would take that as good news. Unless they're addicted to the medicine. Even so, it seems doubtful that today's market reactions are signalling any major changes to existing trends. Stocks are short-term overbought and probably need to work off some short-term excesses. And bond yields have gotten very oversold. Some retracement (or consolidation) of those recent trends shouldn't be too surprising.
