Yields and expectations for a rate hike after the jobs report

City says 7,000 summer jobs are available for Boston youth ages 14 to 18

NEW YORK >> Yields rose in the US bond market today after the highly anticipated report on the US labor market.

The US stock market is closed in observance of Good Friday, as are many markets across Europe. That left the US bond market as one of the few markets open to respond to the latest jobs update, which showed that hiring lost a bit more momentum than expected last month but remained largely resilient.

The data was highly anticipated because it could provide a big clue to the Federal Reserve, which is facing a difficult decision about interest rates that will affect the entire economy. Should you continue to raise interest rates in order to bring down inflation, which is still high? Or should it take a swing at signs of a slowing economy and stress in the banking system caused by last year’s barrage of interest rate increases?

The immediate reaction from the bond market today seems to be tilting towards another rally. Not only have Treasury yields been rising, so are bets that the Federal Reserve will raise interest rates by another quarter of a percentage point in May at its next meeting.

The yield on the 10-year Treasury rose to 3.40% from 3.30% late Thursday, as of noon ET, when I was recommended to end bond trading. The two-year yield, which tends to move further based on Fed expectations, rose to 3.96% from 3.83%.

Traders are also betting on a two-in-three chance that the Federal Reserve will raise interest rates in May, according to data from CME Group. The day before, they almost saw an opportunity to flip the coin that the Fed would not act on rates, something that hadn’t happened in over a year.

Today’s jobs report showed that employers added 236,000 jobs last month, a slowdown from February’s 326,000 jobs and slightly short of economists’ expectations. Meanwhile, wages rose 0.3% compared to February, matching expectations. But the year-over-year wage gains 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 to bring down inflation, but it’s a blunt tool that only works by slowing down the entire economy. This increases the risk of a recession and hurts the prices of stocks, bonds and other investments.

“The job market is exploding,” said Brian Jacobsen, chief investment analyst at Allspring Global Investments. “Salary gains are still high, but total hours worked have fallen two months in a row. Salary gains are not as extensive as they used to be and hours worked are cut.”

Jacobsen said he sees no reason for the Fed to raise interest rates based on the jobs report alone, and said next week’s update on inflation could be more important. The government will provide the latest monthly update on the prices paid by consumers on Wednesday. Economists expect it to show another slowdown, but for inflation to remain well above the Fed’s target.

Today’s jobs report came on the heels of a series of reports on the economy this week that showed weak momentum. A measure of the health of the US manufacturing industry shrank at its worst level since the summer of 2020, when the pandemic was ravaging the global economy. A separate measure of US service sectors was weaker than expected, while employers reported fewer job openings across the country.

Many economists see a recession later this year as likely. But some say the narrow possibility remains that the Fed can raise interest rates enough to fully control inflation without causing a severe recession.

Also complicating matters for the Fed is the belief in the bond market that the central bank will have to cut interest rates later this year in order to support the economy.

Such cuts could act like stimulants to the financial markets and ease conditions for the economy, but they would likewise give inflation more oxygen. The Fed has so far consistently said that it does not see any interest rate cuts this year. The dangers of stopping the fight against inflation too soon are often cited.

“Off-trend job growth and a modest rise in unemployment is what the Fed is aiming for, but a weak labor market supports the recessionary narrative and reinforces markets’ expectations of a rate cut,” said EY chief economist Gregory Daco.

Ahead of the US jobs report, stocks rose across most of Asia.

Shares in Shanghai were up 0.5%, the Nikkei 225 in Tokyo was up 0.2%, and the Kospi in Seoul was up 1.3%. Bangkok, Taiwan and Malaysia also made gains.