A large upside surprise to US payrolls pushed back the prospect of rate cuts by the Federal Reserve until later in the year and contributed to higher global bonds yields and a stronger US dollar. Equities managed to look past the rise in interest rates, with the S&P reaching another all-time high, as optimism about the economy outweighed the prospect of rates remaining at restrictive levels for longer. Economic activity appears robust in the first quarter. The Atlanta Fed GDPNow forecast stood at 4.2% on an annualised basis before the data release.
US labour market data for January was significantly stronger than expected. Nonfarm payrolls increased 353k, which was close to double the consensus estimate, and exceeded the highest forecast on Bloomberg. Revised data for the previous 2 months added a further 126k jobs. The unemployment rate was unchanged from December at 3.7%. Average hourly earnings increased 0.6% m/m, which was double median economist forecasts and took the annual rate to 4.5%.
The data prompted a further reassessment that the Fed would make near term rate cuts. The implied probability of a 25bps rate cut in March has been scaled back to 20%. The probability was closer to 80% ahead of the FOMC on Thursday. This was before Fed Chair Powell pushed back against imminent rate cuts saying a move won’t be appropriate until the central bank gains more confidence that inflation is moving sustainably towards 2%.
Comments by US policy makers reiterated the message that near term rate cuts are unlikely. Federal Reserve Governor Bowman said she expects inflation to fall further with interest rates held at the current level, but it’s too soon to consider cutting rates. Separately Chicago Fed President Goolsbee said he wanted to see more evidence of inflation reaching the 2% inflation goal before cutting rates.
US treasury yields moved sharply higher in response to the labour market data. 2-year yields increased 16bps to 4.36% which was the largest daily upward adjustment since March. 10-year treasury yields advanced 15bps to 4.03%, marking a sharp reversal from 2024 lows close to 3.80%, reached in the lead up to the FOMC. The treasury market now looks ahead to the supply pipeline this week. There is US$121 billion of treasury issuance split across 3-,10-, and 30-year bonds.
High interest rates have contributed to strong demand for money market funds. Assets, which are predominantly short-term government debt, have topped US$6 trillion for the first time according to data released by the Investment Company Institute. Demand for these funds has continued in 2024 after more than US$1 trillion of inflows from retail and institutional investors in 2023.
The US dollar made strong gains against global currencies aligned with diminished expectations of rate cuts by the Fed and further evidence of US economic exceptionalism. The dollar index advanced nearly 1% and is now 2.5% higher since the start of 2024. The yen underperformed within the major currency pairings given its sensitivity to moves in US rates. NZD/USD was amongst the weakest G10 currencies falling more than 1% in offshore trade Friday night and registering a fresh 2024 low near 0.6060. Both NZD/EUR and NZD/GBP closed near the weekly lows.
NZ government bond yields ended the local session little changed in the absence of domestic catalysts. 10-year bonds declined 1bp to end the week at 4.56%. Australian 3 and 10-year bond futures are ~10bp higher in yield since the local close yesterday pointing towards higher NZGB yields on the open.
[chart;daily exchange rates]
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