An upside surprise to US nonfarm payrolls and strong wage growth contributed to sharply higher global bond yields and a broad-based gain for the US dollar. The S&P, which had initially traded to a fresh intra-day record high ahead of the data, dropped close to 0.5% before rebounding and ending the session little changed. Equity markets were generally softer in Europe and Asia. Global credit markets were little changed with spreads remaining close to the tightest level in several years.
Nonfarm payrolls advanced 272k last month, which was higher than all the forecasts in the Bloomberg survey. The consensus was for a rise of 185k. There were modest downward revisions of 15k to the previous two months. Average hourly earnings were also stronger than expected rising 0.4% over the month and at a 4.1% annual rate. However, the unemployment rate — which is derived from the alternative household survey — increased to 4% from 3.9%, the highest level in over two years.
Overall, the data suggests the labour market remains resilient despite the impact of high interest rates. The strength risks keeping inflationary pressure elevated - earnings may not be cooling as much as expected - which will keep policy makers cautious about the impact on inflation. This was the last major report Fed officials will see ahead of the FOMC this week - May CPI data is released on the same day.
The market reduced the amount of implied Fed rate cuts after the data. There is now 36bps of easing priced by the end of the year, down from close to 50bps at the start of the session. While strong payrolls data suggests there is no urgency for the Fed to cut, the inflation backdrop remains key to the timing for easier monetary policy. However, the data will reinforce the Bank’s cautious stance, with policy makers set to debate how restrictive rates are.
In Canada, the unemployment rate rose 0.1 to 6.2%, matching expectations. This is the third rise in four months. However, the pickup in wages to a 5.2% annual rate prompted caution about the pace of future Bank of Canada (BoC) rate cuts. The BoC implemented its first rate cut last week on the expectation that inflation will continue to moderate.
Global bond market moved higher in yield led by the re-pricing in the US treasury yield curve. 2-year treasury yields spiked 16bps to 4.89% which reversed more than 50% of the decline in yields since late May. The yield curve flattened marginally with 10-year treasury yields up 14bps to 4.43%. 10-year gilts increased 9bps to 4.26% while 10-year bunds ended 7bps higher at 2.62%.
The US dollar followed treasury yields higher. The dollar index made its largest daily gain since April. In the majors, both the euro and yen fell about 0.8% against the dollar. However, the largest moves were in the Scandinavian and Australasian currencies which declined close to 1.5% against the greenback. The latest CFTC data revealed there has been further reduction aggregate long dollar positioning.
NZD/USD closed last week on the session lows just about 0.6100 and a full big figure below pre payrolls levels. The NZD is weaker on the major cross rates though remained stable against the AUD near 0.9280.
NZ fixed interest markets ended the local session on Friday little changed in the absence of domestic catalysts and stable offshore markets. Swap rates were unchanged across the curve while government bond yields declined 1bps with 10-year bond yields ending the session at 4.63%. Australian 10-year government bond futures are 7bps higher in yield terms from the local close on Friday, suggesting higher NZ yields on the open.
There is no domestic data in the day ahead and it is a quiet international calendar to start the week.
[chart;daily exchange rates]
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