It was all about the paycheck.
Investors looked beyond a hurricane-induced drop in nonfarm payrolls in the September employment report to focus instead on a large bump in wages, although that too was also likely distorted by the storms.
“The recent extreme weather in the U.S. has caused jobs to be shed. But what the Fed will be really pleased about is that wage growth has been strong. It’s pretty hard to see how the Fed won’t hike in December now,” said Luke Hickmore, senior investment manager at Aberdeen Standard Investments, which has $758 billion in assets under management.
The initial reaction in financial markets was most clearly seen in Treasurys. Traders extended a selloff in 2-year Treasury notes, sending the yield TMUBMUSD02Y, +1.67% soaring above 1.52% for the first time in 10 years. The benchmark 10-year yield TMUBMUSD10Y, +0.42% rose nearly 4 basis points to 2.389%, a two-month high. Yields, which move inversely to prices, subsequently trimmed their rise but remain higher on the day.
In turn, the U.S. dollar took a cue from the initial jump in yields, extending an advance against major rivals and pushing the ICE U.S. Dollar Index DXY, -0.11% which measures the currency against six major rivals, above 94.00 for the first time since July. Higher yields can make a currency more attractive to currency traders. As the yield rise faded, however, the dollar lost altitude.
The knee-jerk reaction by yields and the dollar appeared to knock some shine off the stock market, said Kathleen Brooks, research director at City Index, in a note. Major indexes traded only slightly lower after scoring another round of all-time highs on Thursday. The S&P 500 SPX, -0.30% scored its sixth straight record close Thursday, its longest such streak since 1997.
Fed-funds futures showed traders now see a 93.1% chance the Federal Reserve will deliver its third rate increase of 2017 in December, up from 77.5% on Thursday, according to CME Group data. Expectations for a rate increase have risen sharply over the past month after hawkish signals from Federal Reserve officials. A month ago, futures reflected just a 36.7% chance of a December rate rise.
The Labor Department said the U.S. shed 33,000 jobs in September. The unemployment rate, however, fell to 4.2%, a 16-year low, from 4.4%. And wages rose 0.5%, or 12 cents, to $26.55 an hour. Year over year, wages were up 2.9%, up from 2.7% in August and matching a postrecession high, though analysts also cautioned against reading too much in to the wage strength due to possible storm-related distortions.
After all, the impact of the hurricanes was probably felt disproportionately by low-wage workers, said Eric Winograd, U.S. economist at Alliance Bernstein, noting, for example, that the data showed more than 100,000 restaurant jobs were lost for the month, likely pushing up the aggregate hourly wage.
Still, wages are on the rise and likely to continue rising, he said in a note, underpinning expectations the Fed will continue to raise rates.
Investors willingness to look past the payrolls number “could usher in a new leg higher for the dollar,” Brooks wrote, with the ICE index potentially targeting the 98.00 level, while the 10-year yield could head for 2.6% if it can push through 2.4%.