Here’s why the TLT ETF and DXY index diverged after US NFP data

The iShares 20+ Year Treasury Bond ETF (TLT) rose by more than 1% on Friday while the US dollar index (DXY) dived by over 70 basis points after the US nonfarm payrolls (NFP) data. US equities soared, with the Dow Jones and S&P 500 spiked by over 1.30%.

Weak US NFP data

The US published a weak jobs report on Friday. According to the Bureau of Labor Statistics (BLS), the unemployment rate rose from 3.8% in March to 3.9% in April. Analysts were expecting the figure to remain unchanged at 3.8%.

The economy created 175k jobs in April, missing the estimated 238k. It was a sharp reversal after the economy added over 315k jobs in the previous month.

Other parts of the report were not good too. The average weekly hours dropped from 34.4 to 34.3 while the average hourly earnings rose by 3.9%. Wages have been growing by over 4% in the past few months. The participation rate remained at 62.7%.

These numbers confirm that the economy is weakening. Last week, a report by the Bureau of Economic Analysis (BEA) revealed that the economy expanded by 1.6% in Q1, down from 3.4% in the previous month.

Earlier this week, a report by the Conference Board noted that consumer confidence dived sharply in April. It dropped to its lowest level in months. That was notable since consumer spending is the biggest part of the economy. 

On Wednesday, a separate report by the Institute of Supply Management (ISM) revealed that the manufacturing PMI dropped to 49.2 in April. A PMI figure of less than 50 is usually a sign that a sector is contracting.

Implication on the Fed

Therefore, the TLT, QQQ, and SPY ETFs jumped while the US dollar index tumbled because of these numbers implications to the Federal Reserve. 

While inflation is still red hot, analysts now believe that the Fed will start to cut interest rates later this year. The swap market points to a rate cut starting in the third or fourth quarter of the year. It also expects two rate cuts this year.

That explains why Treasury bond yields tumbled after the report. The 10-year yield retreated to 4.49% while the 5-year fell to 4.55%. Bond yields move inversely to prices. In a note, Dan Suzuki, an analyst at Richard Bernstein Advisors said:

“It pretty broadly suggests job growth is modestly easing but not collapsing, which helps wage pressures come down. Meanwhile, manufacturing jobs and hours were solid, which indicates that part of the economy continues to have solid support.”

It is unclear whether this price action in the TLT and DXY index will hold as the focus now shifts to the US Consumer Price Index (CPI) report scheduled for May 15th. There are signs that inflation held steady in April as energy prices and industrial metal prices soared. It is also worth noting that initial pops after a big report tends to be short-lived.

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