Solid Wage Gains Boost Yields, the U.S. Dollar, Major Equity Indexes

A better-than-expected U.S. jobs report on Friday fueled a rebound in the U.S. Dollar, while driving U.S. equity markets sharply higher. The move also drove U.S. Treasury yields higher as it solidified the chances of a June rate hike by the U.S. Federal Reserve.

U.S. Economic Data

U.S. job growth accelerated in May and the unemployment rate dropped to an 18-year low, highlighting tightening labor conditions. The government also reported solid wage gains, making a rate hike in June near-certain, and raising expectations of a fourth hike this year.

According to the Bureau of Labor Statistics, the U.S. economy continued to add jobs at a brisk pace in May, with nonfarm payrolls up 223,000 and the unemployment rate falling to 3.8 percent. Economists were looking for payroll growth of 188,000 and the jobless rate to hold steady at 3.9 percent.

Most importantly, the closely watched average hourly earnings metric rose 0.3 percent, slightly warmer than expected, yielding an annualized rate of 2.7 percent, up one-tenth of a point from April. Economists were looking for a 0.2 percent increase.

Almost all of the reports on Friday posted better-than-expected results. The major ISM Manufacturing PMI came in at 58.7, beating the estimate and the previously reported 57.3.

Also coming in stronger-than-expected was Construction Spending and ISM Manufacturing Prices. Final Manufacturing PMI was slightly below the estimate.

U.S. Treasury Markets

U.S. Treasury yields rose Friday after the government reported that the economy added more jobs than expected while wages increased better than expected in the month of May.

The yield on the benchmark 10-year Treasury note was higher at 2.888 percent, down from session highs above 2.9 percent. The yield on the 30-year Treasury bond was also higher at 3.035 percent.

U.S. Dollar

Rising Treasury yields helped make the U.S. Dollar a more attractive investment. However, gains may have been limited by trade worries as the European Union, Canada and Mexico are expected to retaliate to the import tariffs on steel and aluminum announced by President Donald Trump earlier in the week.

An easing of political tensions in Italy may have also helped limit the dollar’s gains after they drove the Euro sharply lower earlier in the week and the dollar to a 6 ½ month against a basket of currencies. However, a revived coalition deal between two anti-establishment parties pulled the country back from snap elections.

U.S. Equity Markets

The strong jobs data helped the major stock indexes recover from the previous day’s weak performance. The benchmark S&P 500 Index was up 1.1 percent, helped by a rise in the financials and tech sectors. The benchmark Dow Jones Industrial Average rose 0.90 percent. A 1.1 percent gain in shares of Goldman Sachs supported the Dow. The NASDAQ Composite advanced 1.5 percent lead by solid gains in Facebook, Amazon, Netflix and Google-parent Alphabet.