US government bonds and stock futures sold off on Friday after employment data showed red hot labour conditions, leading traders to boost their expectations for Federal Reserve rate increases.
Treasury yields shot higher after the closely watched US jobs report, which showed employers added 528,000 jobs in July, more than double the 250,000 expected by economists and up sharply from 398,000 in June.
The two-year Treasury yield, which is sensitive to monetary policy expectations, surged more than 0.15 percentage points to 3.21 per cent — a sharp jump for a market that typically moves in small increments. Longer-dated bonds came under more subdued pressure. Meanwhile, S&P 500 futures fell 1.1 per cent.
Trading in federal funds futures now shows that markets are expecting the Fed’s main interest rate will hit 3.61 per cent in February 2023, from an estimate of 3.42 per cent in the previous session. The federal funds rate currently stands at a range of 2.25 to 2.50 per cent.
The strong jobs data, which also showed the unemployment rate ticking down, pushed back against concerns that the world’s biggest economy may be headed for a recession. It could also give the Fed impetus to continue with its rapid increases, after it pushed borrowing costs higher by 0.75 percentage points in both June and July.
“The unexpected acceleration in non-farm payroll growth in July, together with the further decline in the unemployment rate and the renewed pick-up in wage pressure, make a mockery of claims that the economy is on the brink of recession,” said Michael Pearce, economist at Capital Economics, who added that “all the details [of the report] appear to support continued aggressive rate hikes from the Fed”.
The US dollar followed Treasury yields higher on Friday, with an index tracking the buck against half a dozen peers up 1 per cent in recent action. The pound and euro each dipped about 1 per cent, while the Japanese yen slipped about 1.4 per cent.
In equities, European stocks fell with the regional Stoxx 600 down 0.8 per cent, after gains for Asian shares, with Hong Kong’s Hang Seng up 0.1 per cent.