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Government bonds rallied and stocks fell on Wednesday as traders responded to weak US employment data ahead of the Federal Reserve’s latest interest rate decision.
The two-year US Treasury yield, which is highly sensitive to interest rate expectations, was on course for its biggest daily drop this year, falling 0.15 percentage points to a low of 4.21 per cent. The drop in yields — which was also felt in longer-dated debt — came after payroll processor ADP reported that US companies added fewer jobs than forecast this month.
The weaker employment data comes ahead of a Fed meeting later on Wednesday at which the US central bank is expected to give insight into when it might start cutting interest rates this year. Evidence of a flagging US labour market could push the Fed to cut interest rates sooner than it had planned.
The probability of a Fed interest rate cut in March implied by futures markets rose to 60 per cent, from 40 per cent on Tuesday, according to CME’s FedWatch tool.
In the stock market, the S&P 500 fell 0.8 per cent shortly after the open, and the Nasdaq Composite dropped 1.5 per cent, pulled lower by tech stocks following Tuesday’s weaker than expected growth forecasts from Google parent Alphabet.
Adding to the market jitters ahead of the Fed announcement was a 45 per cent drop in the shares of New York Community Bank after it reported a surprise loss in the fourth quarter and said it would cut its dividend. The company last year bought failed Signature Bank in a government-assisted deal, and the news on Wednesday resurrected fears of weakness in the regional banking sector.
The KBW index of US regional banks was down 3.8 per cent.
Bonds also rallied in Europe. Two-year German yields — a benchmark for the eurozone — were down 0.12 percentage points at 2.41 per cent, extending earlier declines which had come after figures showing lower than expected German inflation.