The chaotic week for financial markets ended with a rally in risk assets — possibly driven by short-covering — as regional banks rebounded from a brutal rout and solid jobs data tempered fears of a recession. Treasuries fell.

A rally in equities halted the S&P 500’s longest losing streak since February. PacWest Bancorp soared over 80 per cent, following a rout that saw its shares tumbling to a record low. Western Alliance Bancorp and First Horizon Corp., which were also strongly hit this week, jumped. The KBW Bank Index of financial heavyweights rebounded from its lowest since September 2020.

Wall Street’s favorite volatility gauge, the VIX, snapped a four-day surge to hover near 17. Strong earnings at Apple Inc. helped lift the megacap tech space, with the world’s most-valuable company climbing almost 5 per cent. 

U.S. hiring and workers’ pay gains accelerated in April, showing signs of labor-market resilience and inflationary pressures in the face of headwinds.

“For now, this report is another sign that the Fed hasn’t broken the economy yet,” said Callie Cox, a U.S. investment analyst at eToro. “The bears’ best argument is that a recession is around the corner, but it may be hard to make that argument until we see actual evidence in jobs data.”

Another key aspect of the data is the fact that the strong figures also increase chances the Federal Reserve will hold rates higher for longer, and potentially keep the door open to an 11th straight hike in June.

FEDSPEAK

Fed Bank of St Louis President James Bullard said policymakers will probably have to push rates higher to cool inflation, but added he would wait and see what the data show before deciding what move to support in June. Bullard also said he thinks the central bank can still achieve a soft landing, with inflation returning to the target without triggering a significant downturn.

Rates on swap contracts linked to Fed meetings — which on Thursday briefly priced in a cut in July — moved higher, to levels consistent with a stable policy rate until September — followed by at least two quarter-point cuts by year-end. Treasury two-year yields climbed as much as 15 basis points to 3.94 per cent.

“If the Fed was expecting definitive confirmation it’s time to pause, this is not that signal,” said Ronald Temple, chief market strategist at Lazard. “All said, 500 bps of rate hikes are having an impact, but it’s too early to declare victory over inflation.”

In fact, while inflation has shown some signs of moderation, it’s still well above the central bank’s 2 per cent target. The core consumer price index, which excludes food and energy and is closely watched by the Fed, is projected to show a 5.5 per cent increase in April from a year ago. The report is due Wednesday.

Bank of America Corp.’s Michael Hartnett — who correctly predicted the equity exodus last year — said that a “new structural bull market requires big Fed easing,” which in turn needs a “big recession.”

Resilience in the labor market and price pressures that remain sticky, however, are likely to prevent the Fed from pivoting to cut rates. The strategist reiterated a call to “sell the last rate hike” in the note dated May 4, before the jobs report came out.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.9 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 2.1 per cent
• The Dow Jones Industrial Average rose 1.6 per cent
• The MSCI World index rose 1.5 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro was little changed at US$1.1018
• The British pound rose 0.5 per cent to US$1.2635
• The Japanese yen fell 0.4 per cent to 134.85 per dollar

Cryptocurrencies

• Bitcoin rose 2.4 per cent to US$29,585.59
• Ether rose 6 per cent to US$1,991.7

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.43 per cent
• Germany’s 10-year yield advanced 10 basis points to 2.29 per cent
• Britain’s 10-year yield advanced 13 basis points to 3.78 per cent

Commodities

• West Texas Intermediate crude rose 4.1 per cent to US$71.36 a barrel
• Gold futures fell 1.5 per cent to US$2,025.80 an ounce