The 10-year Treasury yield surged past 4% on Thursday, hitting a four-month high as strong job market and service-sector data boosted the odds of multiple additional Fed rate hikes. Payroll processor ADP estimated private-sector firms added 497,000 jobs in June, doubling predictions. That shocker left investors bracing for a hot official jobs report on Friday and cooled off the S&P 500 in Thursday stock market action.
ADP recently revised its methodology, so economists don't swear by the data. Yet the biggest estimated job gain since February 2022 crushed any hope of a soft June jobs report from the Labor Department on Friday. ADP estimated a gain of 232,000 jobs in the leisure and hospitality sector and 90,000 more construction jobs.
Fed Rate Hike Odds Rise
Other data out Thursday added to the picture of a resilient economy that isn't close to rolling over despite 5 percentage points of Fed rate hikes and regional banking woes. Markets are now pricing in 95% odds of an additional quarter-point Fed rate hike on July 26. Odds of yet another hike on Sept. 20 jumped to 31% from 18% on Wednesday. If not in September, the odds of a hike in November are nearly 50%.
Jobs Report Forecast
Economists expect Friday's jobs report to show employers added 213,000 payroll positions. The jobless rate is seen dipping to 3.6% from 3.7% in May. Wage growth is seen slipping to 4.2% from 4.3%.
May's jobs report showed employer staffing levels grew by a strong 339,000. However, a continued drop in the workweek to the shortest length since the Covid lockdown seemed to indicate a softening labor market below the surface.
Yet the big picture — along with a host of other economic reports out Thursday — now points to ongoing strength, not underlying weakness.
Layoffs Moderate
Announced layoffs in June tumbled 49% to 40,709, reported outplacement firm Challenger, Gray & Christmas. The firm headlined its report, "Is the Tech Purge Over?"
New claims for jobless benefits rose 12,000 to 248,000 in the week through July 1. The four-week average dipped 3,500 to 253,250. The number of people continuing to claim benefits slipped 13,000 to 1.72 million in the June 24 week. Ongoing claims have been trending lower since peaking at 1.86 million in early April. That suggests laid off employees are having some success finding other work.
The Labor Department also reported that job openings fell by about a half-million to 9.8 million in May. But that's still 1.6 openings per unemployed worker, or about 33% more than before the pandemic.
"The moderation (in hiring) continues to be quite gradual, a good sign for job seekers but a concern for the Federal Reserve," wrote Nick Bunker, Indeed Hiring Lab research director.
Finally, the Institute for Supply Management survey of service-sector managers showed business activity accelerated in June. The ISM nonmanufacturing index jumped 3.6 points to 53.9, comfortably above the neutral 50 level and estimates for 50.8.
S&P 500, Treasury Yields
The 10-year Treasury yield surged 12 basis points to 4.06%, the highest since March 2, before the banking crisis erupted. The two-year yield, more closely tied to Fed policy, hit 5.12% intraday, a 16-year high.
Meanwhile, the S&P 500 pulled back 1.1% and the Nasdaq composite 1.2%.
Through Wednesday, the S&P 500 had climbed 15.8% year to date and 24.3% from its bear-market closing low on Oct. 12.
Solita Marcelli, chief investment officer in the Americas for the global wealth management division of UBS, wrote, "The market is too upbeat about the prospect that the Fed can achieve a soft landing for the U.S. economy, combining a swift decline in inflation with relatively resilient growth."
Risks remain that the Fed could hike more than markets expect, she said.
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