US jobs boom fuels interest rate fears

A spectacular report on employment in the United States yesterday revived fears that the Federal Reserve will raise interest rates again this year.

In another day of turbulence in bond markets, borrowing costs rose after closely watched nonfarm payrolls data showed the world’s largest economy added 336,000 jobs last month.

That was nearly double the 170,000 economists expected and added to market nervousness about the path of interest rates.

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said: “The astonishing strength of the US non-farm payrolls report is sure to spook the bond market further as the rates narrative ‘higher for longer’ interest rate gains more support.’

Wall Street’s main stock indices opened lower after the figures, aggravating the losses seen in recent days, although they later recovered from lows.

In London, the FTSE 100 gave up gains seen earlier in the day to close up just 0.6 per cent at 7,494.58.

And there was more drama in bond markets, adding to the sell-offs seen in recent days. The yield on the 30-year U.S. Treasury bond – a key measure of borrowing costs – rose above 5 percent to levels not seen since the 2007-2009 financial crisis. British 30-year bonds also rose to more than 5 percent.

The strong U.S. employment numbers, while reflecting an excellent period for American workers, rattled markets due to the implications for the Federal Reserve.

It has been aggressively raising interest rates to tackle inflation, but took a breather last month with a pause in the hiking cycle.

The hope has been that the Federal Reserve can engineer a so-called “soft landing,” in which inflation can be brought under control without having to raise rates so much as to cause a recession. But signs of an active labor market could persuade the central bank to raise rates again.

Yesterday’s report showed that, as well as a better-than-expected outlook for September, more jobs than previously thought were created in July and August, with the figures revised upwards to a total of 119,000.

The unemployment rate remained unchanged at 3.8 percent. However, wage growth slowed: Wages rose just 0.2 percent month-on-month in September and 4.2 percent year-on-year, less than in August.

Traders increased their bets that the Federal Reserve will raise rates again this year. Mui said: “While employment resilience is to be celebrated, markets are currently in ‘bad news equals good news’ mode as the bond market simply does not want to endure hot data.

‘Despite aggressive interest rate increases from the Federal Reserve and some pockets of weakness in the US economy, this report raises concerns that the labor market may remain too hot for too long.

Richard Carter of Quilter Cheviot said figures like yesterday’s “make the risk of inflation soaring again seem more like a reality.” And he added: ‘The fact is that interest rates are not yet having the desired effect of curbing demand and tightening conditions.