Dollar strengthens as US payrolls surprise to the upside
Much better than expected US non-farm payroll data on Friday sent the dollar sharply higher, while US bond yields also moved up and the markets priced in the Fed hiking rates by the end of the year. The US labour market looks in better shape than previously thought, which might encourage some on the FOMC to push for faster hikes to head off inflationary pressures. The dollar gained to $1.1520 this morning to the euro (from $1.1640 just prior to the data) and to $1.3330 to sterling. EURGBP is still remaining in that relatively tight range around 86.4p.
The data sent US yields higher, particularly at the shorter end of the curve. US 2-year yields were up 10bps to 4.15% while 10-year yields rose 6bps to over 4.5%. German 10-year yields were little changed on Friday, though ticking up, but were up about 10bps for the week; similarly, UK 10-year yields were flat for the day on Friday but up 10bps for the week. Markets have also brought forward the timing of a Fed rate hike with a 25bps increase fully priced in for December of this year—and a 60% chance of a hike in October, whereas before the payrolls data a first hike was not priced in until March of next year.
Equities lost ground on Friday with the S&P 500 down 2.6% on Friday, its worst single day in more than 6 months. The Nasdaq lost over 4% for the day as some of the shine came off AI and semiconductor stocks, which drove the move down in equities. In Europe, the loss was less severe, with the Eurostoxx down 0.7% for the day and the FTSE more or less flat. The hopes for peace in the Middle East towards the end of the week saw a barrel of Brent crude trade at around $93 on Friday, though news of Israeli strikes on Lebanon and Iranian strikes on Israel over the weekend may see oil prices move higher at the start of this week.
US non-farm payrolls rose by 172,000 in May, much higher than the consensus forecast of 88,000, while revisions to the previous two months saw a further 93,000 jobs added. The unemployment rate was unchanged at 4.3%. The revisions mean that the 3-month average was 188,000, the best since early 2024, and indicates the US labour market is in a better position than previously, though having had little or no jobs growth during all of 2025. One thing to note, however, is that job creation is heavily concentrated in leisure and hospitality (potentially boosted by the upcoming World Cup) and public sector jobs in government, education and health, providing the majority of new employment with little job creation in other sectors. In fact, aside from those sectors, all other sectors in the US have shown net job losses in aggregate since December 2022. In addition, real wages are being squeezed with average hourly earnings up 3.4% year-on-year in May but PCE inflation running at 3.6%. Nonetheless, with seemingly renewed impetus in the labour market and inflation above target, this data may embolden some of the more hawkish members of the Fed to push their colleagues into a faster and potentially sharper hiking cycle.
On the agenda this week, the main event is the ECB meeting conclusion on Thursday with a 25bps rate hike a virtual certainty according to the latest market pricing. We also get US inflation data and NFIB small business optimism. We also get labour market data in the UK.