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MAC Monitor — July 10, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended July 7, 2023

  • US yield curve steepens over mixed jobs data
  • Signs of cooling labor market depress dollar
  • Portfolio risk soars as stocks and bonds sell off together

US yield curve steepens over mixed jobs data

Long-dated US Treasury yields rose more than short rates in the week ending July 7, 2023, amid a mixed set of job market indicators. On Thursday, the ADP national employment report showed that the US private sector had added nearly half a million new positions in June, which was more than double the consensus prediction of 228,000. This propelled government borrowing costs to their highest level since early March, with 10-year yield rising above 4%, while the 2-year rate closed the day just shy of the 5% mark. However, the rise in short rates was reversed entirely on Friday, when the latest non-farm payroll report from the Bureau of Labor Statistics (BLS) slightly undershot expectations. Long yields, on the other hand, remained elevated, reducing the inversion of the 10y-2y term spread by nearly 20 basis points compared with the previous week.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated July 7, 2023) for further details.

Signs of cooling labor market depress dollar

The US dollar depreciated 0.6% against a basket of major trading partners in the week ending July 7, 2023, amid signs that the American labor market may be starting to cool down. The BLS reported on Friday that 209,000 new non-farm jobs were created in June—the slowest pace since December 2020. It was also the first time in 15 months that the actual number came in lower than average analyst projections, which had predicted a growth of 225,000 positions. With maximum employment being part of the Federal Reserve’s dual mandate, weaker jobs growth would give the central bank less flexibility to tighten monetary conditions in its fight against inflation. A downward revision in interest rate expectations would then, in turn, put additional pressure on the currency.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated July 7, 2023) for further details.

Portfolio risk soars as stocks and bonds sell off together

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio rebounded to 7.7% as of Friday, July 7, 2023, from 6.4% the week before. Most of the increase in overall volatility stemmed from a closer co-movement of stocks and bonds, as both asset classes sold off in tandem last week. The effect was most pronounced for the fixed income assets in the portfolio, which saw their combined share of total portfolio risk surge by 7.5 percentage points. Developed non-US equities experienced the biggest absolute increase in their risk contribution, as European shares suffered greater losses than their US counterparts.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 7, 2023) for further details.