Wall Street stocks fell and the euro traded close to parity with the dollar after a stronger than expected US jobs report stoked expectations of the Federal Reserve aggressively raising interest rates.
The S&P 500 share index lost 0.5 per cent in early trades, while the technology-focused Nasdaq Composite dropped 0.8 per cent.
The yield on the benchmark 10-year Treasury note, which moves inversely to the price of the debt security and sets the tone for borrowing costs worldwide, rose as much as 0.08 percentage points to 3.08 per cent, around its highest level so far this month. The two-year yield, which closely tracks interest rate expectations, added 0.06 percentage points to 3.10 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 forecasts of 265,000 by economists polled by Bloomberg. The unemployment rate stayed at 3.6 per cent while average earnings rose 5.1 per cent annually.
Ahead of the jobs report, investors had keenly awaited updates on inflationary trends in the labour market that had the potential to shift expectations for how far the Fed might raise borrowing costs.
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 a benchmark rate of about 3.5 per cent by next February, up from around 3.4 per cent before the payrolls data.
“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.”
The euro steadied at $1.012, after earlier coming to within less than a cent of hitting parity with the dollar for the first time in two decades. The dollar index, which measures the US currency against a basket of six others, traded flat at around its strongest level since 2002.
In contrast to their expectations for the Fed, traders are placing bets on the European Central Bank remaining 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 vital fuel surging in Europe, 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 in small increments thereafter, with the rate rising above 1 per cent by February next year.