Yahoo Finance

By Geoffrey Smith and Peter Nurse

Investing.com -- The bond market continues to flash warning signs about inflation, with the 10-year Treasury yield hitting its highest since late 2018 overnight. The U.S. employment will shed light on whether inflation is weakening the trend in job growth, or whether it’s drawing more people back into the labor market. Elon Musk is a big step closer to completing his acquisition of Twitter and oil prices rise again as the EU tries to remove a stumbling block to its Russian oil embargo. Here’s what you need to know in financial markets on Friday, 6th May.

1. Bonds still flashing warning signs

The bond market continues to flash warning signs after another highly volatile day left markets torn between the twin fears of inflation and recession.

The U.S. 10-year yield, which can be taken as a rough proxy for short-term rates over the next decade, hit a new 3½ year high of 3.10% overnight, reflecting perhaps the realization of how much liquidity conditions will change later in the year when the roll-off of the Fed’s balance sheet accelerates.

The 2-year Treasury yield, however, was less volatile and is set to end the week roughly where it started it. That suggests that market expectations for Fed rates in the next two years haven’t changed much, for all of the volatility witnessed in the last two days.

The overall impression is one of high uncertainty exacerbated by thin liquidity, against a backdrop of rising fear of ‘stagflation’ setting in.

That fear was in evidence on Thursday in response to the Bank of England’s rate hike cum growth downgrade, and the risk of the Eurozone heading the same way is growing by the day. German industrial orders and production both fell sharply in March, while Bank of France Governor Francois Villeroy de Galhau warned that a weak euro risked worsening the inflation picture still further.

2. Payrolls growth set to slow a bit

The U.S. economy is expected to have added another 391,000 jobs in the month through mid-April, a slight slowdown from the previous month’s 431,000.

The official labor market report, due at 8:30 AM ET, is also set to show the jobless rate ticking down to 3.5% of the workforce. However, perhaps the most important numbers in the report will be the participation rate and average hourly earnings.

Record high vacancies and a shortage of workers are allowing wages to grow at rates well above what is consistent with low inflation. As such, any further acceleration in wage growth is likely to revive the fears of higher interest rates that have battered markets this week. Any sign of inactive people returning to the workforce will, by contrast, ease such fears. The participation rate has risen by nearly 1 percent in the last five months as pandemic savings were drawn down, especially by lower income groups.