US government debt under pressure after strong employment data

US government debt came under pressure after a stronger than expected jobs report fuelled expectations of more aggressive interest rate rises by the Federal Reserve.

The yield on the benchmark 10-year Treasury note, which moves inversely to the price of the debt security, rose 0.08 percentage points to 3.08 per cent, around its highest level this month. The two-year yield, which closely tracks interest rate expectations, added 0.09 percentage points to 3.1 per cent.

The US non-farm payrolls report for June showed employers in the world’s largest economy hired 372,000 new workers last month, compared with average forecasts of 265,000. The unemployment rate stayed at 3.6 per cent while average hourly earnings rose 5.1 per cent on a year-over-year basis.

“A strong number means the central bank needs to be more hawkish,” said State Street strategist Marija Veitmane. “You need to see a slowdown in the labour market in order to see inflation coming down.”

With US inflation running at 40-year highs, the Fed raised its main interest rate by an extra-large 0.75 percentage points in June and has signalled it may do so again this month. Futures markets are now pricing in a benchmark rate of almost 3.6 per cent by next March, according to Refinitiv data, up from about 3.4 per cent before the payrolls data.

However, David Kelly, chief global strategist at JPMorgan, cautioned: “The Fed needs to remember that employment is a lagging indicator. What we’re seeing is a slow weakening from a very strong place. It is going to weaken more as the year goes on and it is important the Fed does not assume things will not slow further.”

Moves in equity markets were more muted. Wall Street’s benchmark S&P 500 and the technology-heavy Nasdaq Composite traded choppily in the aftermath of the data, with the S&P closing down 0.1 per cent and the Nasdaq up 0.1 per cent.

The slight increase in the Nasdaq was enough to confirm the index’s longest winning streak since November, with it having risen for five consecutive sessions.

The euro rose 0.2 per cent to $1.018, after earlier coming within less than a cent of hitting parity with the dollar for the first time in two decades. The continent-wide Stoxx 600 closed 0.5 per cent higher.

In contrast to their expectations for the Fed, many traders believe the European Central Bank will remain relatively dovish after the economic outlook for the eurozone darkened in recent weeks.

Goldman Sachs warned on Thursday that the eurozone was “on the edge of recession” as Russia’s move to cut supplies of natural gas sent prices of the fuel surging, dealing a blow to businesses across the region.

“The probability of recession in Europe is very high and recession risk has become more serious in the last few weeks,” said Salman Ahmed, global head of macro at Fidelity International, citing gas supply risks that had the potential to cause “a growth shock”.

“In the US, growth is slowing down but the labour market is very strong and the Fed is in a position where they have to remain hawkish until they see hard data that starts to track some [recent] soft confidence surveys.”

The ECB, which has kept its main deposit rate below zero since 2014, is expected to nudge borrowing costs back into positive territory by September and raise them in small increments thereafter, with the rate rising above 1 per cent by February.