US jobs boom fuels interest rate fears

A blow-out US jobs report yesterday reignited fears that the Federal Reserve will raise interest rates again this year.

On another day of turmoil on bond markets, borrowing costs rose as closely-watched non-farm payrolls data showed the world’s biggest economy added 336,000 jobs last month.

That was nearly twice the 170,000 that was expected by economists and adds to the jitters on markets about the path of interest rates.

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

Wall Street’s main stock indices opened lower in the wake of the figures, compounding losses seen in recent days, though they later fought back from lows.

In London, the FTSE 100 gave up gains seen earlier in the day to close up just 0.6 per cent at 7494.58.

And there was further drama on bond markets, adding to a sell-off seen in recent days. The yield on 30-year US Treasuries – a key measure of borrowing costs – rose above 5 per cent to levels not seen since the financial crisis of 2007-09. UK 30-year gilts also spiked to more than 5 per cent.

The strong US jobs figures, while reflecting a bumper period for American workers, upset markets because of the implications for the Fed.

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

The hope has been that the Fed might be able to engineer a so-called ‘soft landing’ – in which inflation can be brought under control without having to raise rates so much that it causes a recession. But signs of a hot jobs market could persuade the central bank that it must hike again.

Yesterday’s report showed that in addition to a stronger than expected picture for September, more jobs were added than previously thought in July and August – with the figures revised up by a combined 119,000.

The unemployment rate remained unchanged at 3.8 per cent. However, wage growth dampened, with pay increasing by just 0.2 per cent month on month in September, and by 4.2 per cent year on year, lower than in August.

Traders increased their bets that the Fed will raise rates again this year. Mui said: ‘While the resilience in jobs is to be celebrated, markets currently are in ‘bad news equals good news’ mode as the bond market just doesn’t want to stomach hot data.

‘Despite the Federal Reserve’s aggressive interest rate increases and some pockets of weakness in the US economy, this report raises concern the labour market can remain too hot for too long.

Richard Carter at Quilter Cheviot said figures such as yesterday’s ‘make the risk of inflation spiking again appear more of a reality’. He added: ‘The fact is that interest rates are not yet having the complete desired effect of dampening demand and tightening conditions.