Yields Jump Higher After Labor Market Proves its Strength

Bonds dramatically selloff after morning labor data. Swap rates and Treasury yields soared today after early session data revealed an incredibly robust labor market, with yields increasing as many as 18 bps on the short end of the curve. The move erased the Monday through Thursday bond rally, netting the 2-year yield’s move to +9 bps on the week after being down 10 bps yesterday. Elsewhere, the S&P 500 (-1.04%) and NASDAQ (-1.59%) fell today, though both rose overall on the week.

Labor market remains tight. Markets hoped for labor figures to support a deflationary thesis, however today’s figures told a different story. The unemployment rate declined to a 53-year low in January, from 3.5% to 3.4%, wages increased 4.4% on the year, exceeding expectations, and payrolls delivered the biggest surprise; nonfarm payrolls climbed 517,000, far above analysts’ 188,000 estimate and December’s 223,000 increase. Payroll gains were broad-based, with manufacturers, retailers and hospitality firms adding jobs. Despite a slump in housing, construction employment also increased. The results complicate matters for the Fed, given that labor strength was communicated as a key barrier to considering a pivot, and may offer hope to those seeking a softer landing. Some economists are calling the magnitude of today’s figures into question, specifically the payrolls report, saying that seasonal adjustment factors may have overstated the amount of job gains, but most economists agree that labor markets are not yet feeling the effects of the Fed’s most aggressive hiking cycle in recent decades.

Week ahead. Fed voters Jerome Powell (hawk), Michael Barr (dove), John Williams (hawk), Christopher Waller (hawk), and Patrick Harker (neutral) will make public comments throughout the week. Data will be less prevalent, with balance of trade (Tuesday), wholesale inventories (Wednesday), and Michigan consumer sentiment (Friday) the highlights.