U.S. Labor Market Remains Strong

Rates jolt higher in response to labor data. Swap rates and Treasury yields rose across the curve today, jumping significantly higher after morning data and grinding higher throughout the afternoon largely driven by nonfarm payrolls data. The 2-year yield rose nearly 16bps to 4.50% while the 10-year yield closed ~10bps higher at 3.69%. The hot data drove bets for a Fed rate hike, with futures now suggesting an ~82% chance of a 25bp hike by the end of the July FOMC meeting. Elsewhere, equities continued their rally while the VIX dropped below 15, a sign of general market confidence.

May labor data signals continued strength. Total nonfarm payrolls increased by 339,000 in May, with job gains driven by increases in the professional and business services, government, health care, construction, transportation and warehousing and social assistance categories. Though hiring exceeded expectations, a jump in the unemployment rate from 3.4% to 3.7% and a decline in average earnings YoY sent mixed signals. The data may strengthen a Fed pause argument at the June meeting to give policy makers more time to digest incoming data, but others still see a solid labor market. The chief US economist at Santander wrote in a note, “not only the payroll figures but pretty much every other measure of labor demand indicate that the labor market remains hot.”

Week ahead. ISM Services PMI (Monday), durable goods orders (Monday), balance of trade (Wednesday), and wholesale inventories (Thursday) will lead a quieter schedule. ISM Services PMI is expected to increase slightly to 52.5 from 51.9 last month.

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