Over the weekend, the AFR led with this scary headline “Three more rate rises on the cards after bond rout”. This ‘bond rout’ news had coincided with a 121 point sell off of the stock market on Friday. At the core of this short-term panic was a surprisingly ‘bad’ private sector jobs report (called the ADP jobs report that a private sector business puts out) that said too many jobs were created in June!

Now remember, bad news on job creation is good news for those hoping inflation is falling and therefore the Yanks are close to the end of rate rises. That would help us too in two ways. First, it would be good for the stock market because Wall Street will surge once big market players think rate rises are close to over, or actually are over.

Second, when the Yanks’ central bank stops raising rates, and our inflation rate is falling nicely, then we could stop raising rates as well.

In case you’re not a bond market expert, if the people who buy and sell bonds daily think a recession is the key threat, they buy existing bonds, believing future bonds will come with lower interest rates. This drives the price of a bond up and yields (or the effective interest rate) on the bond falls.

On Friday, this ADP private sector jobs report came in with a number for jobs created in the US in June of nearly half a million. This number was nearly double what economists were expecting. That led bond market players to dump existing bonds, which drove their prices down and effectively pushed yields up — that’s a rout.

And if the bond market thinks interest rates must rise because the labour market is too positive and creating too many jobs, then that led economists here to suggest that we might need three more rate rises here to beat down job creation and inflation.

The AFR’s Sarah Jones covered the bond market moves and told us the following: “Money markets responded with Australian government 10-year bond yields soaring to the highest level since 2014 to touch 4.26 per cent, US Treasuries rocketed back through 4 per cent, and the UK 10-year gilt yields are at their highest since 2008. The rout extended into the equity market, with the S&P 500 down 0.8 per cent and futures trading negative ahead of Wall Street’s open on Friday. The sell-off prompted bond traders to price in a new peak RBA cash rate of 4.71 per cent. Until today, financial markets had been anticipating a peak of 4.6 per cent.”

The cash rate is now 4.1% so to get to 4.71% there would need to be two or three 0.25% rises, in rough terms. The problem I have with all this negative scary rate speculation is that it’s based on dodgy data. The ADP report is about as reliable as a weather forecaster!

In 2013, The Guardian looked at the unreliability of the ADP Report. It had an average monthly mistake rate of over 50,000 jobs a month! While they might have improved their survey technique, after many years watching this indicator, I can recall lots of time when it was misleading compared to official numbers.

And on Friday, that’s exactly what happened. The ADP reported a huge 497,000 had been created in June. As I said before, economists expected only 228,000. But the official Jobs Report found only 209,000 were created, which was less than the number economists tipped! That said, economists were closer to the truth than the ADP report, so the bond market antics or rout may well be overdone.

We’ll find out later this week how fighting inflation in the US is going when the Consumer Price Index is released on Wednesday July 12. The headline number is tipped to be in the 3% band, which would be good news. The better news would be a better-than-expected drop in core inflation. If it’s out of the 5% band, the market would love it and the bond market would ‘de-rout’ itself, if such a word exists.

Bond and stock markets overreact to good and bad news but unfortunately the media is quicker to magnify the bad news, which can really scare lots of consumers, business owners and managers, as well as borrowers.

However, given that the main game is to scare us from spending too much to help lower inflation, I better hope not too many Aussies read this story!

By the way, the official Jobs Report did show the unemployment rate fell from 3.7% to 3.6%, but a more encompassing jobless reading, which includes discouraged workers and those holding part-time jobs for economic reasons, rose to 6.9%! Also, average hourly earnings increased by 0.4% for the month and 4.4% from a year ago. That has worried those economists who look for indicators that wages are not feeding inflation.

Summary? The US and Australia aren’t out of the woods with inflation and interest rate rises, but we’re on the right path. Keep your fears in check.