Bullish Job Report Fuels Rate Hike Expectations
New York, NY — The U.S. dollar rose and government bonds fell as the July employment report pointed to a solid labor market, potentially giving the Federal Reserve a little more room to raise interest rates.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose 0.2%, after being down 0.3% ahead of the report. The dollar rose 0.1% to ¥101.35, while the euro fell 0.4% to $1.1087.
The U.S. economy added 255,000 new jobs last month, compared with the forecast of 179,000 by economists polled by The Wall Street Journal, a week after a report showed disappointing gross domestic product growth. Average hourly earnings for private-sector workers rose by $0.08, or 0.3%, from the previous month. (Source: “Payrolls Surge as U.S. Hiring Gains Broad-Based for Second Month,” Bloomberg, August 5, 2016.)
In recent trading, the yield on the benchmark 10-year Treasury note was 1.557%, compared with 1.502% just before the report was released and 1.503% Thursday. Yields rise when bond prices fall.
Among the only caveats are that unusually large payroll gains came from the public sector and that job growth will likely slow in future months as skilled workers become increasingly scarce, he added. (Source: “U.S. Government Bonds Sell Off on Strong Jobs Data,” The Wall Street Journal, August 5, 2016.)
Fed-funds futures, which are used to place bets on central bank policy, showed Friday that investors and traders see an 18% likelihood of a rate increase at the Fed’s September meeting, compared with 12% before the jobs report, according to CME Group. The odds of a rate increase by December climbed to 47% from 32% Thursday.
The yield on the two-year Treasury note, highly sensitive to the Federal Reserve policy outlook, was 0.714% in recent trading, compared with 0.647% Thursday.
Treasury yields have risen from the record lows set in early July in the aftermath of the U.K.’s vote to leave the European Union. Still, they remain extremely low by historical standards, reflecting continued economic uncertainty and accommodative central bank policies.