Stocks and bonds have backed away from the worst of this week’s slump, though key data Friday threatens to spur a fresh slide.

U.S. equity benchmarks ended the day pointing lower Thursday after the latest data showed weekly unemployment claims holding near historical lows. The S&P 500 has been hovering above a key support level that — should it fall below — technical analysts warn could drive a steeper drop. With the gauge already down roughly 8 per cent from July highs, a too-healthy number from Friday’s monthly non-farm payrolls could push yields back up and stocks down.

“Tomorrow’s jobs report may be the most important one of the year,” according to Tom Essaye, a former Merrill Lynch trader. 

If the report is too hot and the yield on the U.S. 10-year bond moves close to 5 per cent, “we could easily see the S&P 500 fall through the 200-day moving average and at that point we could see an acceleration of the declines in stocks,” Essaye wrote in his The Sevens Report newsletter.

The yield on the U.S. 10-year drifted down to 4.72 per cent after touching a 16-year high around 4.88 per cent this week. The 30-year, which recently hit the 5 per cent level, advanced toward 4.9 per cent in Thursday’s session. Wall Street has been keyed in on rising borrowing costs and saw 5 per cent as a likely target for longer-term U.S. government bonds, now some money managers are saying 6 per cent is on the table.

With the U.S. benchmark rate at a 22-year high Fed speakers reinforced the higher-for-longer message and said data would be key ahead of the November meeting. Richmond Fed President Thomas Barkin, who does not vote this year, said the market is seeing a return to a more normal rate seen in prior years. The head of the San Francisco Fed Mary Daly — also a non-voting member — said that the central bank could hold rates steady if jobs and pricing showed signs of slowing. 

“The markets are finally coming to grips with higher long-term rates, and I think we’re seeing more of that reflected in the markets,” said Chris Gaffney, president of world markets at EverBank. “In the past, the Fed seems like they have always adjusted to the markets, but this go around, I think the markets have had to adjust to the Fed.”

Thursday’s report showed a slight rise in the number of people filing for unemployment benefits compared with the previous week. Claims ticked up to 207,000 in the week ending Sept. 30, according to Labor Department data. Earlier this week, the unexpected rise in August job openings spurred the rout in Treasuries. The selloff paused after private payrolls data showed U.S. companies added the fewest number of jobs since the start of 2021 last month.

While markets have stabilized from the recent rout, investor sentiment remains fragile. Investors are keen to see if Friday’s labor data cements bets on a November pause from the Federal Reserve. Currently, swaps are pricing a one-in-four chance of a Fed move higher next month. 

“Friday’s payrolls data, and next week’s inflation number will decide whether the 10-year Treasury yield goes up to 5 per cent or down to 4.5 per cent,” Societe Generale strategist Kenneth Broux said. A higher-than-forecast jobs number could trigger “another wave of dollar-buying and bond-selling,” he added.

In the monthly employment report, economists surveyed by Bloomberg predict the U.S. economy added 170,000 workers in September, slightly less than the previous month. 

Even with markets showing signs of calm, strategists’ reports highlight deep concern about the long-term economic toll of higher-for-longer interest rates. Barclays Plc analysts wrote in a note that global bonds are doomed to keep falling unless a sustained slump in equities revives the appeal of fixed-income assets.  

“There is no magic level of yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally,” analysts led by Ajay Rajadhyaksha said. “In the short term, we can think of one scenario where bonds rally materially. If risk assets fall sharply in the coming weeks.”

Oil extended a retreat, with WTI crude reaching below US$83 per barrel for the first time since late-August. The dollar weakened against a basket of its Group-of-10 peers.  

Key events this week: 

• China has week-long holiday
• Germany factory orders, Friday
• U.S. unemployment rate, nonfarm payrolls, Friday
• Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.4 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World index rose 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.4 per cent to US$1.0551
• The British pound rose 0.5 per cent to US$1.2194
• The Japanese yen rose 0.4 per cent to 148.46 per dollar

Cryptocurrencies

• Bitcoin fell 0.6 per cent to US$27,498.5
• Ether fell 1.5 per cent to US$1,617.56

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.71 per cent
• Germany’s 10-year yield declined four basis points to 2.88 per cent
• Britain’s 10-year yield declined four basis points to 4.54 per cent

Commodities

• West Texas Intermediate crude fell 2.1 per cent to US$82.45 a barrel
• Gold futures were little changed