Stocks fall on firm jobs data. The S&P500 fell 0.2% to 2,077 and the Dow lost 0.3% to 17,373. Today’s employment data kept the possibility of September tightening in play. The reading was not very decisive but it shows that the labor market is firm. 215k jobs were created in July and the unemployment rate held steady at 5.3%. There was also an upward revision to the previous report of +14,000 jobs. The two year yield increased 2 basis points to 0.72% after originally hitting 0.75%. The dollar index rose to 98.33, the highest level in 4 months. The 10 year yield fell 6 basis points to 2.17% and the 30 year yield lost 8 basis points to 2.83% as the yield curve continues to flatten.
The labor market is steady as the unemployment rate remained at 5.3%. Payrolls increased 215,000 which was slightly below expectations of 225,000. It was a relatively nondescript report that was not decisive in either direction. Fed funds futures reflect a 58% chance of a hike in September. Short yields, which are the most sensitive to interest rate changes, rose after the report. The report was more supportive of a rate hike in September than not. It is expected that further data will need to disappoint on the downside in order to delay the Fed.
Yields are rising on high yield bonds. The oil selloff is not good for the high yield bond market. The average yield on the Bank of America high yield index rose above 7%. For speculative grade energy companies the yield is higher than 11%. Many defaults are expected from companies that cannot operate and fulfill their obligations with prices at this level. The default rate is expected to rise from 2% to 4% by year end. In addition, Moody’s has noticed that legal protection for investors in junk bonds is down to the lowest level since the gauge was started in January 2011.
The Brazilian real and the Malaysian ringgit are among the hardest currencies hit in the emerging market selloff. The ringgit is at the lowest level in 17 year. Foreign reserves in the country recently fell below the $100bn level and are at a five year low. The ringgit is falling as a result of oil prices, as oil revenue makes up 30% of Malaysian revenue. Malaysia is also negatively impacted by China. In addition, potential political turmoil is a large concern for investors with the prime minister involved in a potential corruption case. The ringgit is down 2.7% this week to 3.924 (ringgits per dollar). Analysts expect further underperformance as a result of political risk, falling fundamentals, and the possibility for rate cuts this year or next. The real is also down 2.2% this week to R3.4941 (reals per dollar).