Traders Firm-Up Rate Hike Bets on Strong Labor Data

Yields climb on strong labor data. Treasury yields were up in today’s shortened trading session, led by the short end curve with 2-year yields closing at ~4%, after strong payroll and unemployment data supported a hiking thesis in May. Swap markets are now pricing in a ~66% chance of a 25bp Fed hike in May, up from ~50% prior to the labor data release. The 10-year yield ended the day at ~3.39%. Equity futures also climbed today on the news.

Labor data ahead of the May FOMC meeting indicates continued strength, but some signs of weakening. This morning’s slew of labor data indicated resiliency despite signs of a slowdown in many sectors of the economy. Hiring was concentrated in leisure, hospitality and healthcare, while jobs were lost in retail trade and other services. The data did show some normalization, however, with annual wages rising at the slowest pace since June 2021 and payrolls coming in lower than last month. Another interesting indicator of weakening was a decline in the average workweek to 34.4 hours, the lowest since April 2020 – employers tend to cut hours first before laying off staff when labor demand wanes. On balance, the data still led traders to firm up bets on a Fed hike in May. The Chief Economist at Nationwide Life Insurance Co. noted, “the labor market is strong enough and inflation still elevated and sticky to lead the Fed to raise rates another 25 basis points in May.”

Week ahead. Next week’s data includes CPI and March FOMC minutes on Wednesday, PPI on Thursday and retail sales and consumer sentiment data on Friday. Stay on the lookout for speeches from the Fed’s Williams on Monday and Harker and Kashkari on Tuesday.