US payrolls surprised strongly, lifting US Treasury yields and nudging up pricing for a September Fed hike. Equities softened while the US dollar’s initial gains faded. Record US diesel prices highlight their ongoing energy-market pressures

A better-than-expected US jobs report contributed to higher front end Treasury yields while equities made modest losses as markets priced a higher chance the Federal Reserve will raise rates this month. The S&P closed around 0.4% lower while major equity indices in Europe were little changed. An initial move higher for the US dollar quickly faded and net moves across currencies were not large.

Oil prices were steady but remained sharply higher over last week as renewed US-Iran hostilities - including Iranian retaliation against US bases in the region - raised concerns about prolonged disruption to energy flows through the Gulf. Brent crude held near US$96 a barrel, leaving it up more than 7% over the week. The impact was also evident in refined fuel markets, with US diesel prices rising to a record US$5.85 a gallon.

Nonfarm payrolls rose 162k in August, well above the 55k consensus and topping all the estimates on the Bloomberg survey. Gains were broad-based across sectors. The unemployment rate stayed at 4.1% despite a rise in participation, while average hourly earnings rose 0.3%, both in line with expectations. The rebound looks more like payback after two weak months and the reversal of seasonal distortions than a sustained acceleration, with the three-month average still modest at 71k. Wage growth also remains consistent with muted labour-market inflation pressure.

Market pricing indicates about a 60% chance of a Fed hike in next week, only marginally above pre-payrolls levels, leaving the meeting finely balanced. Officials have stressed that inflation data will be the key input, but the strong employment report removes a potential argument against tightening. Had August payrolls been weak, following an initially soft July print, caution would have been easier to justify. Instead, hiring momentum has improved, labour-market weakness is less evident, and President Trump’s renewed call for lower rates is unlikely to sway a Fed focused on above-target inflation.

Front-end Treasury yields spiked after the data, with 2-year yields jumping 8bp to a fresh cycle high of 4.42% before paring the move but still ending higher on the session. The response further along the curve was more limited, with 10-year yields little changed near 4.77%.

The US dollar quickly retraced its initial gains, a surprisingly muted response to such a positive economic surprise. G10 currencies were generally firmer against the USD relative to the NZ close, though moves were modest. The yen consolidated after last week’s strong performance, while the CAD underperformed slightly after weaker employment growth. The NZD briefly dipped towards 0.5860 before reversing to end the week near 0.5880, with contained moves on the key cross rates.

NZ fixed income had a subdued local session on Friday. Swap rates closed flat to 2bp higher across the curve, with a flattening bias. Two-year swaps ended at 3.72% and 10-year swaps at 4.48%. Pricing for the October RBNZ meeting was stable near +8bp after Assistant Governor Silk said in a Bloomberg interview that a December hike was more likely than October, noting the Bank’s modelled OCR track.

There is little on the data calendar to start the week, with no domestic or regional releases and a US public holiday likely to dampen market activity. The domestic focus turns to partial GDP indicators ahead of Q2 GDP on 17 September. Building work put in place, released Friday, rebounded strongly in Q2, with manufacturing, wholesale trade and services indicators still to come. Offshore, US August CPI is the key release and will help shape expectations for the September FOMC, while the ECB is expected to raise rates 25bp to 2.50%.

Stuart Ritson is a senior Strategist at BNZ Markets.