US Employment Surprises Threefold, Renewing Tightening Concerns... Dollar and Interest Rates Rise Together

[Mexico City = Shim Young-jae, Correspondent] The US employment figures for August significantly exceeded market expectations, causing the New York foreign exchange and bond markets to quickly tilt towards tightening. As the stronger-than-expected labor market highlighted the possibility of interest rate hikes by the Federal Reserve (Fed), the dollar index surged to 99.9 during trading, and US Treasury yields rose across the board, particularly for short-term bonds. Notably, the 2-year yield, sensitive to changes in monetary policy, reached its highest level since January of last year, reflecting a reassessment of the market's interest rate trajectory.

On the 4th (local time), the US dollar index (DXY) rose by 0.253 points (0.26%) to 98.966 at 9:05 AM Eastern Time. Immediately after the employment report was released, the increase was even sharper. The dollar index jumped from around 99.035 to 99.932 during trading, marking a rise of about 0.5%. Although there was some pullback from the peak, the influx of dollar buying triggered by the employment surprise was evident.

August Employment Increased by 162,000... Exceeding Expectations by Threefold

The key variable that lifted both the dollar and Treasury yields was the US employment report for August. Non-farm employment in the US increased by 162,000 in August, significantly surpassing the Dow Jones' market forecast of 53,000 by more than three times. The unemployment rate remained unchanged at 4.1%.

With the labor market proving to be much stronger than expected, market attention quickly shifted to the Fed's next steps. With inflation rates exceeding the Fed's target of 2%, strong employment figures reduce the necessity for the Fed to lower rates out of concern for economic slowdown. Instead, there is an increasing caution that rates may be raised again to curb demand and inflationary pressures.

Chris Rupkey, Chief Economist at FWDBONDS, noted that while Fed officials have evaluated the labor market as stable, the employment report showed that jobs are stronger than expected despite high energy prices and living costs. He assessed that if the Fed determines that economic demand is sufficiently strong, the possibility of a rate hike in the coming weeks could become a new risk factor for the market.

The foreign exchange market reacted immediately. The dollar index, which indicates the value of the dollar against six major currencies, surged vertically at the same time as the employment announcement, while the euro fell from around $1.1623 to $1.1583 before the announcement. This was influenced by the upward adjustment of US interest rate expectations, enhancing the relative interest rate attractiveness of dollar-denominated assets.

The intraday movement of the dollar index also illustrates the rapid change in market sentiment. The index showed relatively limited fluctuations around the 98.7-98.8 range until the employment announcement but surged past the 99 mark immediately afterward. Although it later retraced to around 98.9, it still remained above the previous day's closing of 98.713.

Short-Term Rates Surge... 2-Year Yield at Highest Since January 2025

In the US Treasury market, the movement of short-term bonds was even more pronounced. The yield on the 10-year Treasury briefly exceeded 4.80% immediately after the employment announcement. After rising to around 4.802% during trading, it recorded 4.784% at 9:05 AM (Eastern Time), which is 1.2 basis points higher than the previous day's closing of 4.772%. Since Treasury prices move inversely to yields, the strong employment figures led to a sell-off in bonds.

Particularly, the 2-year Treasury yield, sensitive to the Fed's interest rate outlook, jumped by more than 7 basis points, reaching as high as 4.425%, the highest level since January of last year. It later showed around 4.389%, but the increase from the previous day was 5.5 basis points. The 1-year yield also rose by 5.5 basis points to record 4.162%.

The rise in long-term yields was relatively limited. The 30-year Treasury yield showed a slight increase of 0.5 basis points to 5.248%. The 1-month yield rose to 3.770%, an increase of 1.5 basis points, while the 3-month yield rose to 3.867%, up 2.9 basis points. The 6-month yield also increased by 3.2 basis points to record 4.018%.

The fact that short-term rates rose more sensitively than long-term rates indicates that the market views this employment report as a catalyst for changing the Fed's short-term monetary policy path rather than altering long-term growth prospects. The rise of the 2-year yield to its highest level since January of last year is interpreted as the bond market quickly pricing in the possibility of rate hikes.

Until the day before, the atmosphere in the bond market was the opposite. On the 3rd, the 10-year yield fell by more than 2 basis points, and the 30-year yield also dropped by over 1 basis point. However, just before the employment report was released, the 10-year yield had dropped to around 4.75%, only to jump to the 4.80% mark immediately after the announcement, marking a sharp reversal in direction within a day.

Eyes on Inflation Ahead of Fed's September Meeting

The market is now focused on the inflation data set to be released next week, which is seen as the last key variable ahead of the Federal Open Market Committee (FOMC) meeting scheduled for the 15th-16th. While strong employment figures alone suggest that the Fed may have the conditions to raise rates again, actual policy decisions must also consider the inflation trend.

This data contrasts with calls from the political arena for rate cuts. JD Vance, the US Vice President, argued the day before that the Fed should lower rates to ease the burden of home purchases. However, the market reacted more to the employment figures that significantly exceeded expectations than to the political calls for rate cuts. The strength of the dollar and the surge in short-term Treasury yields indicate that there is a growing consensus that the Fed may find it difficult to pivot to a more accommodative monetary policy immediately.

The flow that permeated the New York foreign exchange and bond markets that day can be summarized as 'strong employment → upward adjustment of Fed rate outlook → Treasury sell-off and rising yields → dollar strength.' Particularly, as the increase in employment significantly exceeded market expectations, the market's focus surrounding the Fed's September meeting is shifting towards evaluating the possibility of keeping rates steady or further hikes rather than rate cuts.

However, the fact that the dollar index rose to 99.932 during trading and then retreated to around 98.9, along with the 10-year yield dropping from 4.802% to 4.784%, suggests that the market is reassessing the policy implications of the employment figures after the initial shock. If inflationary pressures are confirmed in next week's inflation data, clearer grounds for assessing the sustainability of the dollar strength and Treasury yield increases observed that day are expected to be established.

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