Yields, dollar jump on blowout US jobs report, stocks edge up

Yields, dollar jump on blowout US jobs report, stocks edge up

By Herbert Lash and Dhara Ranasinghe

NEW YORK/LONDON (Reuters) -Treasury yields jumped, the dollar surged and global equities edged higher on Friday after a blowout U.S. jobs report scuttled any lingering hopes for a near-term cut in interest rates and underscored a strong economy that can ward off a recession.

Nonfarm payrolls increased by 353,000 jobs in January, the Labor Department’s Bureau of Labor Statistics said, almost double the 180,000 forecast by economists polled by Reuters.

The benchmark 10-year Treasury note yield shot above 4% and the dollar gained against all major currencies as employers added far more jobs than expected and average hourly earnings increased 0.6% after rising 0.4% in December.

The data came after the Federal Reserve on Wednesday pushed back against expectations for an imminent rate cut, with Chair Jerome Powell warning inflation was “still too high.”

The jobs report showed the market had gotten too far ahead of when it expected the Fed to cut rates, said Kevin Gordon, senior investment strategist at Charles Schwab in New York.

“In the short term there’s going to be a little bit of a digestion phase because the market had been expecting the Fed to cut sooner,” Gordon said. “But in the medium term, it could still be a good thing because generally a resilient labor market, strong economy is good for stock prices.”

MSCI’s gauge of stocks across the globe advanced 0.32% while on Wall Street, the tech-laden Nasdaq and benchmark S&P 500 rose 1.09% and 0.60% respectively as investors cheered robust quarterly results from Meta Platforms and Amazon.com.

But the Dow Industrials eased slid 0.12%.

Meta surged 20.7% to hit a record high after issuing its first dividend days ahead of Facebook’s 20th anniversary, along with a revenue and profit beat on advertising sales in the holiday shopping period.

“Things will be better than people expect and the rate cuts that are expected are going to come later, or not at all,” said Christopher Rossbach, chief investment officer at asset manager J.Stern & Co.

“We’re looking at strong (corporate) results and a solid underlying economy.”

After the jobs report money markets projected the Fed would lower its target rate, currently in a range of 5.25%-5.5%, by 123.3 basis points by year-end, down from 140.3 bps just before the data was released.

Futures pared bets for a rate cut in March to 20.5% from 36.5% just before the report, and slashed the likelihood of a 25 or 50 bps cut in May to 62.9% from 91.6%, according to CME Group’s FedWatch Tool.

The two-year Treasury yield, which reflects interest rate expectations, surged 19.1 basis points to 4.385% and the yield on 10-year notes rose 17.8 basis points to 4.041%.

Global shares have risen for 12 of the last 13 sessions as markets conjure up a so-called Goldilocks scenario of easier monetary policy alongside robust economic growth, which some investors warn is unrealistic.

“The (stock) market is on happy pills,” said Noel O’Halloran, chief investment officer of KBI Global Investors.

“Investors think we are going to have rate cuts, inflation dropping, a miraculous soft landing that doesn’t do any damage to earnings, and areas of the market like technology are priced on the belief the stocks can grow miraculously to the sky.”

RISKS

Investors brushed off a big Chinese market selloff caused by a lack of hoped-for government stimulus, as well as stress in U.S. regional banks and commercial property.

China shares fell to new five-year lows and posted their worst weekly drop in five years, with the Shanghai Composite 1.5% lower on the day and down 6.2% for the week, its largest such loss since October 2018. The blue-chip CSI300 hit a five-year low.

Almost a year after the failure of California’s Silicon Valley Bank heightened concern about the balance sheet health of smaller U.S. lenders, New York Community Bancorp this week reported increased stress in its commercial real estate portfolio.

In Tokyo, shares in Aozora Bank slumped for a second straight session to bring its weekly loss to 33%, after provisioning for U.S. office loan losses.

The dollar index, a measure of the U.S. currency against six others, rose 0.79%, while the euro was down 0.69% to $1.0797. The yen weakened 1.24% to 148.27 per dollar,

Oil prices dipped about 2% setting up both benchmarks for a weekly loss given China’s faltering economy and persistent geopolitical tensions.

U.S. crude fell 2.13% to $72.25 per barrel and Brent was at $77.25, down 1.84% on the day.

Spot gold dropped 1.0% to $2,034.88 an ounce.

(Reporting by Herbert Lash, additional reporting by Chuck Mikolajczak, Naomi Rovnick, Dhara Ranashinghe and Stella Qiu. Editing by Andrew Heavens, Kirsten Donovan)