2-Year Treasury Yield Hits 16-Year-High on Hot Jobs Data

A hiring sign is displayed at a restaurant in Prospect Heights, Ill., on April 4, 2023. Nam Y. Huh/Reuters

The two-year Treasury yield reached its highest level since the global financial crisis as investors anticipate that the Federal Reserve will further tighten monetary policy following the release of hot jobs data on July 6.

In June, private U.S. businesses created 497,000 jobs, the biggest increase since February 2022 and more than the consensus estimate of 228,000, according to the ADP Research Institute’s National Employment Report (pdf).

The services sector accounted for most of the job creation, led by leisure and hospitality (232,000), trade and utilities (90,000), and education and health care (74,000). The goods-producing industry added 124,000 new positions, driven primarily by construction (97,000) and mining (69,000).

Despite the current administration announcing more significant investments in the sector, manufacturing continued the latest trend of job cuts, laying off 42,000 people. Various manufacturing measurements, such as the S&P Global Manufacturing Purchasing Managers’ Index (PMI), suggest the industry is in a recession.

Information and financial activities also saw an employment decline of 30,000 and 16,000, respectively.

“Consumer-facing service industries had a strong June, aligning to push job creation higher than expected. But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge,” Nela Richardson, chief economist at ADP, said in a statement.

Wage growth slowed in June, slowing to 6.4 percent year-over-year for job stayers, down from 6.6 percent in May. For job changers, pay gains eased for the 12th consecutive month to 11.2 percent.

Small and medium-sized businesses produced all of the new jobs last month, with 299,000 and 183,000, respectively. Large companies slashed payroll by 8,000.

The latest ADP figures come after Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover Summary (JOLTS) data found that the number of job vacancies tumbled by 496,000 to 9.824 million, from 10.103 million in April. The sharpest drops were situated in health care and social assistance (negative 285,000) and finance and insurance (negative 139,000).

It’s the third time that job openings have slipped below the 10 million mark in 2023.

Job quits unexpectedly returned above 4 million in May, the highest level since December 2022. The quits rate—a measurement of voluntary job leaves among total employment—edged up to 2.6 percent, up from 2.4 percent in the previous month.

ADP’s count comes a day ahead of the more closely watched nonfarm payrolls report from the Department of Labor. Economists forecast that the U.S. economy created 225,000 new jobs last month, while the unemployment rate dipped to 3.6 percent. Annualized average hourly earnings are also projected to slide to 4.2 percent.

Treasury Yields and the Fed

The strong labor market has many investors thinking the Federal Reserve will raise interest rates again as early as this month.

The two-month Treasury yield jumped by about 13 basis points, to top 5.08 percent, a level not seen since June 2007. Meanwhile, the benchmark 10-year yield rose more than 12 basis points to nearly 4.07 percent.

Traders work on the floor of the New York Stock Exchange on May 3, 2023. Seth Wenig/AP Photo

After the June Federal Open Market Committee (FOMC) policy meeting, the updated Survey of Economic Projections (SEP) signaled that two more rate increases were coming before the year’s end as the median fed funds rate was expected to touch 5.6 percent.

Fed Chair Jerome Powell indicated at a European Central Bank (ECB) forum in Portugal last week that a tight labor market is one of the contributing factors to the institution’s thinking that more restriction is warranted. He also refrained from taking rate increases at consecutive meetings off the table.

At the same time, minutes from the June meeting revealed that rate-setting Committee members believed a slower pace of rate hikes was the appropriate path to take.

According to the CME FedWatch Tool, the futures market is mostly penciling in a quarter-point boost at the July FOMC meeting. Traders have removed any potential rate cuts from the discussion, a complete reversal from the first half of 2023.

While a July rate increase is almost certain amid above-target inflation levels and a tight labor market, ING economists aren’t convinced that the Fed will pull the trigger on a second rate boost.

“The Fed acknowledges that goods price inflation is under control and housing costs will slow rapidly through the second half of 2023, but policymakers are focused on core services excluding housing, which remains hot,” ING economists Carsten Brzeski, James Knightley, and James Smith wrote in a research note.

“There are tentative encouraging signs, which we suspect will intensify as the lagged effects of previously implemented policy rate increases and tighter lending conditions bite.”

The June annual inflation rate is projected to slow to 3.2 percent, with the core consumer price index (CPI), which strips the volatile energy and food sectors, forecast to ease to just 5.1 percent. The Fed’s preferred inflation gauges—the personal consumption expenditure (PCE) and core PCE—are expected to ease to 3.1 percent and 4.4 percent, respectively.

On a month-over-month basis, the four leading inflation indicators are predicted to climb 0.4 percent.

The FOMC will hold its two-day policy meeting on July 25–26.