Stocks rally and bonds drop after ‘astonishing’ US payroll data

Wall Street rallied on Friday and Treasuries slid after investors were stunned by US government data that showed a sharp drop in the unemployment rate in May.

The S&P 500 followed European stocks higher, rising 2 per cent at the open, following the release of data that showed that non-farm payrolls added 2.5m jobs last month. Consensus expectations had been for a fall of 7.5m; the most optimistic forecast was for a drop of 1.7m.

Investors moved out of 10-year US Treasury bonds, leading yields to rise above 0.9 per cent, the highest level since mid-March.

The US benchmark stock index has advanced almost 30 per cent since hitting a low in late March on optimism over reopening of the economy after lockdowns to contain the spread of coronavirus, supported by a host of stimulus measures from the government and central bank.

However, the latest jobs data has given hope that the downturn in the world’s biggest economy might not be as deep as feared. Economists had been expecting the unemployment rate to climb close to 20 per cent, not far off the Great Depression peak of 24.9 per cent. But the new jobs added pushed the rate down to 13.3 per cent in May, from 14.7 per cent in April.

“This a mind-blowing number and shows that the economy is improving,” said Naeem Aslam, chief market analyst at Ava Trade. “This data, if it is a true reflection of the economy, is likely to speed up the recovery.”

The figures were “astonishing,” said Seema Shah, chief strategist at Principal Global Investors. “The market response will be resoundingly positive, but it also raises the question: does the US really need as much policy support as it is receiving?”

It came a day after another 1.9m first-time jobless benefit claims were registered last week, which disappointed economists who had hoped the rate of claims would be slowing more rapidly.

In Europe, stock markets rose on optimism over the decision by the European Central Bank to add firepower to its stimulus package with an expansion of its bond-buying programme.

The continent-wide Stoxx Europe 600 index was up 1.8 per cent, helped by a 1.4 per cent gain in London’s FTSE 100. Frankfurt’s Xetra Dax jumped 2.2 per cent, which left the benchmark up 50 per cent in just over 50 sessions.

Travel and leisure stocks were the largest gainers, albeit from low levels, as countries began to form bilateral agreements to reopen their borders. Europe’s travel and tourism sector, which has been hit hard by coronavirus, is down almost a third this year.

However, some analysts are confident the rally has plenty of momentum. Bank of America said the Stoxx 600 was set to rise a further 10 per cent by the third quarter of this year as Europe’s economies returned to activity.

The broad-based lifting of restrictions in most economies “implies scope for a marked pick-up in economic activity”, said analysts at the bank, which would take European equities close to pre-pandemic levels.

The expansion of the ECB bond-buying programme by a further €600bn through to at least June 2021 was more aggressive than most economists had expected and added to hopes that a quick recovery from the pandemic may follow the sharp falls in economic activity.

Greek and Italian government borrowing costs stabilised on Friday, having fallen to their lowest levels in nearly three months on Thursday.

“Policymakers’ efforts to contain strains in the currency union will remain a key driver of eurozone assets this year,” said analysts at Capital Economics.

The bullish mood led to investors moving out of the relative safety of German government bonds for a second straight session, sending the yield on the 10-year Bund above minus 0.3 per cent, its highest level in two months.

The euro fell against the US dollar, after gaining almost 4 per cent in eight days to reach its highest point since early March.

The ECB’s action follows similar moves by central banks in the US, Japan and UK. Together with China’s central bank, their combined balance sheets have risen from $5tn in 2007 to more than $23tn, according to research firm Haver Analytics.

In the Asia-Pacific region, Hong Kong’s Hang Seng added 1.7 per cent, taking its advances for the week to 7.9 per cent, its biggest weekly gain in more than five years.

Meanwhile, Japan’s benchmark Topix rose 0.5 per cent, Australia’s S&P/ASX 200 gained 0.1 per cent and China’s CSI 300 index of Shanghai and Shenzhen-listed stocks added 0.5 per cent.

Oil prices rose higher after Opec and its allies agreed to meet over the weekend to discuss the possibility of extending production cuts. Brent crude, the international benchmark, rose 3.9 per cent to trade above $40 a barrel, while West Texas Intermediate, the US marker, gained 3 per cent at $38.55 per barrel.

Additional reporting by Martin Arnold in Frankfurt

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