A Surprise 165,000 Jobs Lifts Treasury Yields and Pushes December Rate-Hike Odds to About 78%

October's hiring came in at more than double forecasts, and bond traders quickly raised their bets that the Federal Reserve will lift interest rates next month.

Why did Treasury yields rise after the October jobs report?

Yields rose because the economy added far more jobs than expected, which makes a Federal Reserve rate hike in December more likely. Employers added 165,000 jobs in October against forecasts near 65,000. The 2-year Treasury yield, which tracks Fed expectations closely, climbed about 6 basis points to 4.52% after the release.

The Bureau of Labor Statistics released the report at 8:30 a.m. Eastern on Friday, Nov. 6. A Reuters poll of economists had expected 65,000 new jobs. Over the prior 12 months, payrolls had grown by an average of only 48,000 a month, the BLS said, so October stood out.

A basis point is one-hundredth of a percentage point. By about 9:45 a.m. Eastern, the 10-year Treasury yield was up about 3 basis points at 4.87% and the 30-year yield was up 2 basis points at 5.27%, according to Reuters.

What was in the jobs report?

The headline number was not the only surprise. The BLS revised August up by 53,000 jobs, to 186,000, and September up by 31,000, to 60,000. Together, the two months had 84,000 more jobs than first reported. The unemployment rate edged down to 4.1% from 4.2%.

Pay grew faster too. Average hourly earnings rose 14 cents, or 0.4%, to $38.00, and were up 3.1% from a year earlier. Professional and business services added 70,000 jobs, health care added 42,000, transportation and warehousing added 25,000, and manufacturing added 19,000. Our look at September's rise in job openings showed hiring demand picking up before this report.

There were softer spots. The number of people working part time because they could not find full-time work rose by 339,000 to 4.8 million, the BLS said. That detail suggests the job market is not strong for everyone.

Why does a strong jobs report raise the odds of a Fed hike?

The Fed raises rates to cool demand when it worries that inflation will stay too high. A hot job market with faster wage growth can keep prices rising, which gives the Fed more reason to act. The Fed held its target range at 3.75% to 4% on Oct. 28, when two officials wanted a hike, as we covered in our report on that meeting. Inflation remains well above the Fed's 2% goal. The Fed's preferred gauge, the PCE price index, was up 3.6% from a year earlier in September, Hubbard O'Brien Economics noted.

Traders moved quickly. After the report, futures markets priced about a 78% chance of a December hike, up from about 70% earlier, Reuters reported. Hubbard O'Brien, citing fed funds futures, put the odds at 79.1% on Friday afternoon, up from 66.9% the day before. The Fed's next meeting is Dec. 8-9.

"This is a bit of a hawkish jobs report for the Federal Reserve," Susannah Streeter, chief investment strategist at Wealth Club, said in the Reuters report. In finance, "hawkish" means leaning toward higher rates. Peter Cardillo, chief market economist at Spartan Capital Securities, went further in the same report, saying the data "just confirms that the Fed has no choice but to raise rates in December."

How did stocks react?

Stocks were mixed as investors weighed the data against Thursday's sell-off in artificial intelligence and chip stocks. At 2:10 p.m. Eastern, the Nasdaq Composite was up about 1.5% at 24,682, the S&P 500 was up about 0.7% at 7,411 and the Dow was roughly flat at 51,502, Reuters reported. The Philadelphia semiconductor index was up 4.4% at that point. These were afternoon readings, not closing prices.

The rebound came one day after the Nasdaq fell 5.5% into a correction. Even with Friday's bounce, Reuters said the Nasdaq was on track for a fourth straight weekly decline. "We still think AI is the dominant theme in this bull market," Keith Lerner, chief investment officer at Truist Advisory Services, said in the Reuters report.

What this means for your wallet

Bonds and bond funds feel rising yields first. When yields go up, the prices of existing bonds fall. A common rule of thumb uses a fund's duration, a measure of rate sensitivity listed on most fund fact sheets. A bond fund with a duration of 6 years would lose about 0.18% for a 0.03 percentage point rise in yields. On a $10,000 holding, that is roughly $18. It is only an estimate.

Savers may see the other side. Higher short-term yields can support rates on Treasury bills, money market funds and new certificates of deposit. If the Fed does raise rates by a quarter point in December, a variable-rate credit card balance of $5,000 would cost about $12.50 more a year, since many card rates move with the Fed's benchmark.

For long-term investors in a 401(k), one day of yield moves rarely changes much. A mix of stocks and bonds is meant to spread risk, though both can fall at the same time.

What should investors watch next?

New inflation data, including the October consumer price index, or CPI, will arrive before the Fed meets on Dec. 8-9. The November jobs report is scheduled for Friday, Dec. 4, at 8:30 a.m. Eastern, the BLS said. If inflation stays hot and hiring stays strong, the case for a December hike could firm up. A cooler CPI reading could pull those odds back down.