(Adds Powell calendar, data outlook, SF Fed paper; updates
prices)
By Karen Brettell
NEW YORK, Feb 6 (Reuters) - Benchmark 10-year U.S.
Treasury yields hit four-week highs on Monday after a blowout
employment number raised expectations that the Federal Reserve’s
interest rate hikes will not end with a hard economic landing,
and that the U.S. central bank may have more than one more rate
increase left.
Employers added 517,000 jobs in January, while the
unemployment rate hit 3.4%, its lowest reading for more than 53
years, the government reported on Friday.
Other data on Friday showed that U.S. services industry
activity rebounded strongly in January, with new orders
recovering and prices paid by businesses for materials
continuing to rise at a moderate pace.
“That was a big rebound (in ISM) that took away some of the
fears of December weakness,” said Jim Vogel, a senior rate
strategist at FHN Financial in Memphis, Tennessee. Meanwhile,
investors are looking at the jobs report and, seeing a “nice
improvement in January,” have “turned it into inflation that
we’re going to see soon,” Vogel said.
Average hourly earnings increased 0.3% last month after
gaining 0.4% in December. That lowered the year-on-year increase
in wages to 4.4%, the smallest rise since August 2021, from 4.8%
in December. But wage growth was revised upward for 2022,
suggesting a more moderate pace of cooling than previously
thought.
Benchmark 10-year yields rose as high as 3.644%,
the highest since Jan. 6, and are up from a low of 3.333% on
Thursday before the data. Two-year yields reached
4.468%, also the highest since Jan. 6.
The 10-year yields have fallen from a 15-year high of 4.338%
on Oct. 21 on expectations that Fed tightening will lead to a
recession this year.
The yield curve between two-year and 10-year notes inverted further to minus 82 basis points,
reflecting concerns about an imminent downturn.
EXPECTATIONS REVISED
Traders ramped up bets on rate cuts in the second half of
this year after Fed Chairman Jerome Powell seemed unconcerned
about loosening financial conditions and cited progress in
bringing down inflation after the Fed’s meeting on Wednesday,
when it raised rates by another 25 basis points.
But Friday’s data led to a repricing in these expectations.
Fed funds futures traders now see rates rising above 5% in May
and dropping to only 4.79% by December. On Thursday, traders had
expected the rate to peak at 4.88% in June, and then fall to
4.40% by December. Powell is due to speak on Tuesday, and investors will be
watching for any signs that he is adopting a more hawkish
outlook after Friday's data.
Some banks are also readjusting their Fed forecasts in light
on last week’s events.
“Chair Powell did not push back against market pricing for
near-term monetary policy, nor the recent easing in financial
conditions. Despite Powell’s dovish tone, front-end yields
finished the week higher after Friday’s surprisingly strong
labor market report. Hence, we’re adding an additional 25bp hike
to our forecast and now see the Fed funds target range peaking
in May at 5-5.25%,” JPMorgan analysts said in a report.
The next major U.S. economic release that may sway Fed
policy will be consumer price data for January due on Feb. 14.
An analysis published Monday by the San Francisco Fed,
meanwhile, found that U.S. stocks may fall further, and bond
yields rise, as the Fed continues its current round of rate
hikes in coming months.
The Treasury Department will sell $96 billion in
coupon-bearing supply this week, including $40 billion in
three-year notes on Tuesday, $35 billion in 10-year notes on
Wednesday and $21 billion in 30-year bonds on Thursday.
(Reporting by Karen Brettell; Editing by Kevin Liffey and
Jonathan Oatis)
