The U.S. created 390,000 nonfarm jobs in May, well above expectations, and wages grew solidly justifying hawkish Fed comments. The Federal Reserve Vice President Lael Brainard said Thursday there is currently no reason to consider pausing rate hikes in September. Wall Street stocks dropped, and government bond yields rose on the news. 

The benchmark U.S. 10-year Treasury yield climbed to +2.94%, its highest level in two weeks (+20 basis points). The blue-chip Dow fell -0.94% over the holiday-shortened week and -9.46% over the first five months. The S&P 500 lost -1.20% and -13.80% for the year. The tech-heavy Nasdaq shed -0.98% bringing its year-to-date performance to -23.22%, with rate-sensitive growth stocks bearing the brunt of the selloff.

European stock indices followed suit. The MSCI EMU dropped by -0.77% (-12.31% for the year). The FTSE 100 was down -0.69%. So far this year, it’s worth noting that the Footsie is still in positive return territory (+2.01%), lifted by oil majors.

By contrast with the U.S., Asian markets surged higher. Chinese stocks bounced back as Shanghai ended its two-month long Covid-19 lockdowns amid supply chain disruption. Though this is not the end of the zero Covid policy which has negatively impacted the economic output of China, the Shanghai Composite gained +2.08% (-12.21% YTD). The Nikkei 225 closed +3.66% higher at 27,761.57 (-3.58% YTD), extending its winning streak to three weeks in the wake of Fast Retailing stocks (up +7% week-over-week - first component of the Nikkei 225). The holding company which owns Uniqlo reported robust domestic sales. Japan is a contrarian play in 2022, outperforming most other stock markets since the beginning of the year. 

Energy remains the standout leader among S&P 500 sectors  

The recent rally did not last long. Was it another dead cat bounce? Eight of the 11 major S&P sectors finished the week in the red. 

Once again, health care was the worst performer (-3.14%) with biotech stocks in free fall. They ended May in much the same way they started the year, by getting hammered (S&P Biotechnology Select Industry Index down -43.63% YTD).

Financials were also one of the biggest drags (-2.14%) on the broader market as remarks on the economy from JPMorgan CEO Jamie Dimon and Goldman Sachs COO John Waldron raised concerns about a global slowdown. The bear market may still wreak havoc. Even the most defensive sectors declined over the week (consumer staples down -1.72%, utilities down -1.38%). 

On the flip side, industrials (+0.04%) and consumer discretionary (+0.01%) treaded water. The only winner in a broad market gripped by stagflation fears was energy (+1.18% WTD, +60.13% YTD) as oil prices rose for the sixth week in a row (WTI crude oil (Nymex) up +3.30% at $118.87 a barrel).

End of the bond rally

Interest rate jitters keep hammering global bond markets. Treasury yields rose across the board. In the wake of the U.S. 10-year T-note, the 10-year Bund yield rose back to its highest point since June 2014 (+32 basis points at +1.28%) after a more extensive than anticipated jump in German consumer prices (+7.9% on an annual basis). The same held true for the French OAT yield (+30 basis points at +1.79%) as French inflation accelerated more than expected to reach another record in May, reflecting the economic repercussions of the Russo-Ukrainian war.

Against this gloomy backdrop, investment grade corporate bonds suffered heavy losses (-1.42% in Europe, -0.78% in the U.S.). High-yield bonds lost -0.74% in the U.S. but edged up +0.16% in Europe. 

Emerging debt weathered the storm (+0.15%) while the dollar index rose above the 102.00 threshold.

Elsewhere, gold fell slightly (spot price down -0.14% at $1,851.19/Oz). In the crypto space, the Bitcoin price was virtually unchanged above the $29,000 support level while the Ethereum price was down -1.75%, below $1,800. 

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