Yields on Treasuries shot higher following the June ADP private sector jobs report which came in much stronger than expected at 497,000 vs 228,000. This is a continuation of a trend in recent months, showing that economic growth and the labor market are defying consensus predictions of a recession.

In fact, many analysts now believe that the economy could be re-accelerating which has major implications for fixed income and equities. Immediately following the report, odds increased for rate hikes at the next 2 FOMC meetings, and odds for a cut in the first quarter of 2024 sharply declined.

Higher yields and tighter monetary policy are certainly headwinds for equities and fixed income. Additionally, one of the catalysts for the recent rally in equities has been expectations of an imminent Fed pivot given weakening inflation and a softening labor market. Yet, data over the last month have made it clear that the Fed still has more work to do to achieve its objectives.

It’s also interesting to note that yields on shorter-term Treasuries are now approaching their highs from early March. Further, the decline from March into May following the collapse of Silicon Valley Bank and distress at other regional banks has been entirely reversed. 

Finsum: Fixed income weakened following the ADP jobs report which showed that private sector hiring was twice as strong as expected. Ultimately, the report likely means that rates will go higher and stay elevated for longer than expected.