Strong US jobs report dents expectations for Fed rate cuts

Strong US jobs report dents expectations for Fed rate cuts

Expectations of a heavy interest rate cut in the US later this month were dealt a blow on Friday by surprisingly strong jobs numbers.

The US 10-year government bond yield shot above 2 per cent after figures showed the economy added 224,000 jobs in June, comfortably beating expectations of just 160,000.

The benchmark yield surged to 2.037 per cent from 1.98 per cent.

The 2-year yield — which is more sensitive to monetary policy — rose 8.7 basis points (0.087 percentage points), its largest move higher since January 4.

May’s very weak report — with revised figures showing just 72,000 jobs were created — had cemented market expectations that a quarter percentage point July rate cut was all but a done deal and a larger cut was possible, adding fuel to a global bond rally that pushed Treasury yields to their lowest levels in more than two and a half years. Friday’s figures injected a note of doubt.

“The US jobs report creates a bit of a conundrum for the Fed,” said Erik Norland, senior economist at CME Group.

“Overall the mixed nature of the report will probably allow bond traders to continue pricing a Fed rate cut on July 31 but the Fed will probably want to wait for other key pieces of data, such as retail sales and CPI, before committing to such a move.”

Futures markets showed that traders now see just an 11 per cent chance of a half-percentage-point rate cut in July, dramatically down from 30 per cent on July 3. Meanwhile, the perceived chance of a smaller quarter-point cut rose to 89 per cent, from 70 per cent.

Bonds in Europe joined in the sell-off, with yields rising from their recent lows in Germany, France and the UK.

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