The US economy added more jobs in June than it has in any month this year, easing concerns of an impending slowdown and reducing the chance of aggressive cuts to interest rates later this year.
Bonds and US equities fell following the release of the data, which cemented expectations that the Federal Reserve would reduce interest rates by 25 basis points this month — rather than 50bp, as many investors had anticipated.
Investors also scaled back expectations that the US central bank might reduce interest rates twice this year, despite pressure from President Donald Trump for it to cut as aggressively as possible.
“The probability of several rate cuts has diminished as a result of today’s report — though one cut is still very likely,” said Gad Levanon, an economist at the Conference Board. “Consumer spending is 70 per cent of the US economy, and is still not showing any sign of slowing down.”
Non-farm payrolls rose by a net 224,000 last month, according to the Department of Labor, more than forecasts of 160,000 jobs, and marking a recovery from May’s unexpectedly weak result of 72,000.
The unemployment rate went up from 3.6 per cent to 3.7 per cent thanks to more Americans entering the jobs market. Wages continued to rise at the same pace as the previous month, at 3.1 per cent year on year.
Mr Trump welcomed the figures on Friday, calling them “really, unexpectedly good”. But he also used the opportunity to renew his attack on the Fed, saying: “If we had a Fed that would lower interest rates we’d be like a rocket ship. But we’re paying a lot of interest and it’s unnecessary. We don’t have a Fed that knows what they’re doing.”
The two-year US Treasury, which is sensitive to interest rate expectations, staged its biggest sell-off since early January. The yield jumped 10.8 basis points to a near-three-week high of 1.87 per cent. Futures prices suggested a 98.5 per cent chance of a 25bp cut this month and a 1.5 per cent chance of a 50bp reduction.
The yield on the benchmark 10-year government bond, which earlier this week hit its lowest level since November 2016, leapt 8.6 basis points to 2.04 per cent. Bond prices fall as yields rise.
The S&P 500 trimmed earlier declines to finish 0.2 per cent below its record close on Wednesday.
There were, however, some signs of weakness in the data. The department cut April’s jobs number by 8,000 to 216,00, and downgraded May’s figure from the previously announced addition of 75,000. Employment growth in 2019 has averaged 172,000 jobs per month, compared with a monthly average of 223,000 last year.
Overall economic growth also looks to be slowing down. The Atlanta Fed’s GDP tracker suggests there will be annualised growth of 1.3 per cent in the second quarter, sharply below the 3.1 per cent expansion in the first three months of the year.
Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said the latest jobs numbers were “good”, but a rate cut from the Fed in July was “inevitable”.
“Employment growth remains a bright spot amid a fairly mixed bag of US data and yet markets have come to expect a cut now so will fall out of bed if they don’t get one. It does give the Fed some breathing space in the sense that there’s no immediate need now to signal a significant cutting cycle,” he said in a note.
James Knightley, chief international economist at ING, agreed that investors had overestimated the degree of any rate cut: “A really encouraging jobs report that suggests the broad economy is shrugging off the US-China trade uncertainty. While the Federal Reserve is gearing up for precautionary interest rate cuts, we think the market is expecting too much.”
Additional reporting by Joe Rennison in New York