Bond yields tick upwards after US non-farm payrolls shatter expectations

US non-farm payrolls gained 528k in July, which was some way ahead of consensus estimates of 250k. The unemployment rate fell slightly to 3.5% from 3.6% last month. Average hourly earnings increased 0.5%, more than consensus expectations of 0.3%.

David Goebel, Associate Director of Investment Strategy at UK wealth manager Evelyn Partners, comments:

While some economic indicators like PMIs are deteriorating, the jobs market continues to be a bright spot for the US economy.  At the end of July, the release of the second quarter GDP (-0.9%) showed the US economy had contracted for the second consecutive quarter, therefore entering a ‘technical’ recession. This led economists and investors to focus on whether the US is in recession as defined by the National Bureau of Economic Research, who make the decision based on personal income, employment, consumer spending and industrial production.  None of these indicators are suggesting that the US economy is in recession at this juncture.

While this is good news from a growth perspective, it will be of concern to the Federal Reserve, given the upward pressure such a strong labour market could have on inflation. It strengthens the case for another increase of 75bps at their meeting on the 21 September, but that is still a long way off, and there will be more data to digest in the interim. Yields on government bonds moved higher after the release, with the two-year Treasury increasing 14bps to 3.2%.

Compared to the UK and Europe, the US economy looks to be in better shape. Today’s jobs market update suggests the US economy is not in recession but will be of concern for its potential effect on inflation. Next week brings the release of the Consumer Price Inflation for July, which is expected to show a slowdown from last month’s upside-surprise figure.  If that is the case, then it will temper hawkish reaction to today’s jobs data and likely limit the potential for future upside rate surprises.