US stocks set for another record after strong jobs data

• US yields jump and dollar rises after payrolls upside surprise
• Fed rate cut expectations get scaled back
• Recovery in UK yields and the pound is stymied
• A risk premium has been attached to UK bonds, which is likely to remain until the autumn budget

It turns out the US jobs market is not as soft as analysts thought. The June payrolls report was much stronger than expected, the US economy generated 147k jobs, beating expectations for a 106k reading. This is one of the most shocking upside surprises for months. Private sector payrolls were weaker than expected at 74k, but that was not as bad as the ADP reading for June, which came in at -33k.

Unemployment rate unexpectedly drops

The unemployment rate fell to 4.1%, it was predicted to rise to 4.3%. This has triggered an immediate recalibration in the bond market, the 2-year Treasury yield is higher by 9 bps, which is supporting the dollar. USD/JPY has surged above 145.00, and the dollar index is at its highest level for a week, as the US economy continues to defy gloomy forecasts.

Government hiring boosts NFPs

The driver of job growth in the US last month was the government, especially state and local government hiring in education. Federal hiring fell by 7,000 workers last month; however, this is still a major shift. Government hiring slowed sharply earlier this year as Doge attempted to cut government spending. Now that Doge has been scaled back with the exit of Elon Musk from the White House, this could see the US government, especially the states and local governments, ramp up hiring for the rest of the summer and into the Autumn. This could be good news for the US labour market and future jobs growth.

Although there is concern that the private sector is scaling back hiring, the government is an important job creator in the US economy, and if it keeps hiring then it could keep the labour market buoyant for some time. There was also concern that President Trump’s clampdown on immigration in the US could have a big impact on the labour market and push up the unemployment rate. That has not been the case so far, although it is still early days in his Presidency.  

Rate cut expectations get scaled back

Fears about a softer labour market forcing the Federal Reserve into a more aggressive rate-cutting cycle is being rapidly priced out  of the Federal Funds Futures market. The prospect of a July cut has been wiped out, the market initially expected a 25% chance of a cut this morning, that has now been revised down to 4%. A September hike had been fully priced earlier this week, but that is now down to 77%. There are now just over 2 rate cuts priced into the Fed Funds Futures market, which is down from 2.5 cuts expected earlier this week. As rate cut expectations for the Fed get scaled back this is boosting bond yields across the curve and also supporting the dollar.

US stocks set for fresh record high after NFPs

Interestingly, the drop in the unemployment rate has boosted stocks. US and European stocks are all higher on Thursday, as the market adjusts to a more resilient US economy. This is generally positive for stocks, and we could see the S&P 500 push further into record territory, after reaching a fresh record high on Wednesday.

Tesla defies sales decline and stock rises

Tesla is also in focus, after rising nearly 5% on Wednesday it is higher again on Thursday, even after it reported a 13% drop in car sales YoY. This might sound like something that should tank Tesla shares, however, for some analysts, the decline was less than expected, and a growing chorus is suggesting that this could be the nadir for Tesla car sales. Cheaper models are expected to go on sale later this year, which could also boost sales. Although there  are many questions about Tesla, for example, how quickly it can ramp up production of its Robotaxi and its new cheaper models, for now, Tesla’s share price looks like it has made a bottom.

UK: a permanent risk premium could be attached to UK bonds

In the UK, the bond market is recovering on Thursday after Wednesday’s sell off. The Prime Minister has confirmed that Rachel Reeves will remain in place as Chancellor, however, bond yields have not fallen back to the levels that we saw before bonds started to sell off 24 hours ago. The 10-year yield had been down 10bps at one stage, however, this has been eroded, and yields are only down 5bps at the time of writing. A sharp rise in US yields is dragging UK yields higher as we move through Thursday.

This suggests 2 things: 1, highly indebted western economies can see their sovereign debt markets move in unison, which is bad news for those who hoped there could be a full reversal in UK bond yields today. 2, there could be a permanent premium attached to UK yields as we move through the summer months to October’s budget. The premium this time is linked to Labour’s left having increasing control over Kier Starmer and pushing him for ever greater levels of public spending. If the government wants to avoid an embarrassing and devastating fiscal crisis, they need the guts to cut public spending to more reasonable levels. The bond vigilantes are circling, and Labour could be forced to U-turn on the U-turns.