NEW YORK (`) – U.S. bond market yields rose on Friday after a highly anticipated U.S. jobs report.
The US stock market was closed on Good Friday, as were many markets across Europe. With that, the US bond market was one of the few to openly react to the latest jobs update, which showed hiring numbers lost a little more momentum than expected last month but remained broadly resilient.
The data was so anticipated because it could provide a big clue for the Federal Reserve, which is facing a difficult decision on interest rates that will affect the entire economy. Should it keep raising interest rates to bring down still-high inflation? Or should it wait amid signs of a slowing economy and the stress in the banking system caused by last year’s spate of rate hikes?
The bond market’s immediate reaction on Friday appeared to be headed for further hikes. Not only did Treasury yields rise, but so did bets that the Fed would hike rates by another quarter of a point at its next meeting in May.
The yield on the 10-year Treasury bond rose to 3.40% from 3.30% late Thursday at 12 noon ET, when a recommendation to halt bond trading was issued. The two-year yield, which tends to move closer to the Fed’s expectations, rose to 3.96% from 3.83%.
Traders are also betting on a roughly two-in-three chance that the Fed will hike rates in May, according to CME Group data. A day earlier, they saw about a coin toss chance that the Fed wouldn’t move rates, something that hasn’t happened in over a year.
Friday’s jobs report showed employers added 236,000 jobs last month, a slowdown from February’s 326,000 and slightly below economists’ expectations. Wages, meanwhile, rose 0.3% from February to match expectations. But year-on-year wage growth slowed to 4.2% from 4.6%.
A cooler job market is exactly what the Fed is trying to achieve. Raising interest rates is one of the Fed’s most effective ways of undercutting inflation, but it’s a notoriously blunt tool that only works by slowing the overall economy. This increases the risk of a recession and hurts the prices of stocks, bonds and other assets.
“The job market is sweating,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Salary increases are still high, but total hours worked have fallen for two straight months. Salary increases are not as broad-based as they used to be, and hours are being cut.”
Jacobsen said he sees no reason for the Fed to raise rates solely on the basis of the jobs report, and he said next week’s update on inflation could be more important. The government will offer the latest monthly update of the prices consumers are paying on Wednesday. Economists expect the slowdown to continue, but inflation to remain well above the Fed’s target.
Friday’s jobs report followed a series of reports on the economy this week that showed slowing momentum. A health gauge for the US manufacturing industry shrank to its lowest level since the summer of 2020, when the pandemic was ravaging the global economy. A separate measurement of the US services industry was weaker than expected, while employers across the country posted fewer job vacancies.
Many economists believe a recession is likely before the end of this year. However, some say there is still a slim possibility that the Fed could raise rates just enough to get inflation under full control without triggering a deep recession.
Complicating matters for the Fed is the widespread belief in the bond market that the central bank will need to cut interest rates later this year to support the economy.
Such cuts can act like steroids for financial markets and loosen conditions for the economy, but they would also give more oxygen to inflation. The Fed has repeatedly said it does not expect any rate cuts this year. The dangers of giving up the fight against inflation too early are often pointed out.
“The Fed is targeting below-trend job growth and a modest rise in the unemployment rate, but the slacking jobs market supports recession narratives and reinforces market expectations of rate cuts,” said EY chief economist Gregory Daco.
Ahead of the release of the US jobs report, stocks rose across much of Asia.
Stocks in Shanghai gained 0.5%, Tokyo’s Nikkei 225 rose 0.2% and Seoul’s Kospi rose 1.3%. Bangkok, Taiwan and Malaysia also rose.
___ ` business writer Joe McDonald contributed.
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