Yields and dollar jump, stocks rally on blowout US jobs report

By Herbert Lash

NEW YORK (Reuters) – Treasury yields jumped, the dollar surged and world equities rallied on Friday after a blowout U.S. jobs report scuttled any lingering expectations of a near-term cut in interest rates and highlighted a strong economy.

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 market expectations for an imminent rate cut, with Chair Jerome Powell warning inflation was “still too high.”

“The market has been horribly wrong about the near-term trajectory of Fed policy and this is another instance where that’s the case,” said Kevin Gordon, senior investment strategist at Charles Schwab in New York.

“The market’s been correct in assessing that the inflationary backdrop is going to help set the conditions for the Fed to cut,” he said. “But it’s probably ultimately the labor market that’s going to push them into cutting and then will determine the pace and the size of cuts themselves.”

Employment growth had been decelerating, especially into the fourth quarter of last year, but the jobs report showed job creation accelerating, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities America.

“When you go through all the specific details, there were really very few if any pockets of weakness. It was just a very, very strong report and that by itself would suggest that a recession certainly isn’t imminent,” he said.

MSCI’s gauge of stocks across the globe closed up 0.64% while on Wall Street, the tech-laden Nasdaq and benchmark S&P 500 climbed 1.74% and 1.07% respectively, as investors cheered robust quarterly results from Meta Platforms and Amazon.com. Gains by the Dow Industrials were a bit more subdued, rising 0.35%, but low unemployment and a strong economy suggest corporate earnings can increase. Meta surged 20.3% 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. U.S. regional bank stocks recovered slightly from a brutal sell-off sparked by concerns that New York Community Bancorp’s dismal earnings signaled broader problems for the sector.

NYCB shares were up 5.0% following a nearly 45% plunge over the last two sessions after the lender slashed its dividend and posted a surprise loss on commercial real estate loans.

In Japan, Aozora Bank slumped to a three-year low after it took a huge loan-loss provision against U.S. office loans.

After the jobs report, money markets projected the Fed would lower its target rate, currently in a range of 5.25%-5.5%, by 123.8 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 61.8% from 91.6%, according to CME Group’s FedWatch Tool.

“I’ll trade a stronger economy with less rate cuts than a weaker economy with more rate cuts,” said Keith Lerner, chief market strategist at Truist Wealth in Atlanta.

The two-year Treasury yield, which reflects interest rate expectations, surged 17.6 basis points to 4.370% and the 10-year’s yield rose 16.5 basis points to 4.028%. The two-year’s rise was on track to post the biggest one-day gain since May 2023, and the 10-year since July 2023.

Investors brushed off a big Chinese market selloff caused by a lack of hoped-for government stimulus.

The blue-chip CSI300 hit a five-year low, with the Shanghai Composite 1.5% lower on the day and down 6.2% for the week, its largest weekly loss since October 2018.

The dollar index, a measure of the U.S. currency against six others, jumped to a seven-week high as it rose 0.83%, while the euro was down 0.74% to $1.0792. The yen weakened 1.24% to 148.29 per dollar.

Oil prices fell by about 2% after the U.S. jobs data reduced the odds of imminent rate cuts, which could dampen crude demand if restrictive monetary policy curbs the economy.

U.S. crude futures settled down $1.54 at $72.28 a barrel, while Brent fell $1.37 to settle at $77.33. Both benchmarks posted losses of more than 7% for the week.

Gold prices slipped as the dollar jumped, making bullion more expensive for overseas buyers, and higher yields reduced the appeal of non-interest bearing gold.

U.S. gold futures settled 0.8% lower at $2053.70 an ounce.

(Reporting by Herbert Lash, additional reporting by Chuck Mikolajczak, Chibuike Oguh, Naomi Rovnick, Dhara Ranashinghe and Stella Qiu.; Editing by Andrew Heavens, Kirsten Donovan, Cynthia Osterman and Deepa Babington)