By Herbert Lash
NEW YORK (Reuters) - A blowout U.S. jobs report on Friday sparked a delayed rally on Wall Street as the data revealed a strong economy with moderating inflation that helped set aside fears of higher interest rates that caused bond yields to soar.
September's job numbers were almost double the 170,000 forecast of economists polled by Reuters and shocked a market trying to understand how the U.S. Federal Reserve will address a strong economy and its mission to lower rates to its 2% target.
Nonfarm payrolls increased by 336,000 jobs last month, the Labor Department said, while data for August was revised higher to show 227,000 jobs were added instead of the previously reported 187,000.
"Maybe the economy has structurally changed to the point where real yields need to be higher than what they were in the five years before the pandemic," mused Marvin Loh, senior global macro strategist at State Street (NYSE:STT) in Boston.
"We are in a period where it's unclear how much slowing of the economy 500 basis points have actually generated," he said, referring to the amount the Fed has raised interest rates since March 2022.
The yield on the benchmark 10-year Treasury note jumped more than 13 basis points within a half hour after the report's release to a fresh 16-year high of 4.8874%, adding to this month's steep sell-off. Bond yields move inversely to price.
Bond yields later eased a bit from early highs and the three major U.S. stock indexes rallied as stock investors saw moderating wage growth as decelerating inflation further.
"We've raised rates, inflation is coming down and the economy is booming," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.
"It's the best of all worlds as long as inflation keeps coming down and that's the risk - if inflation doesn't keep coming down," he said.
Futures traders raised the probability of the Fed hiking rates in November to 29.2%, up from 23.7% before the data's release, according to CME Group's (NASDAQ:CME) FedWatch Tool. The Fed's overnight rate was priced above 5% through next July.
Everyone who has looked at the September employment data is stunned, said Matt Miskin, co-investment strategist at John Hancock Investment Management in Boston. "The jobs report was a stunner and the market reaction is stunning."
The addition of 70,000 government jobs suggests another subtle tailwind to the economy, he said. "What you got to point to is fiscal deficit-spending is helping this economy stay stronger than it otherwise would," he said, adding a caveat:
"At the end of the day, I do think it makes a rate hike more likely because the jobs market is so strong."
The dollar index, a measure of the greenback against six other currencies, initially rose then fell, down 0.24%, as it snapped an 11-week winning streak after hitting its best level in about 11 months earlier in the week.
The euro broke 11 straight weeks of declines against the dollar.
Oil prices rose but posted their steepest weekly losses since March after another partial lifting of Russia's fuel export ban compounded demand fears due to economic headwinds.
Brent futures settled up 51 cents at $84.58 a barrel. U.S. West Texas Intermediate crude futures rose 48 cents to settle at $82.79.
Euro zone bond yields gained, while the closely-watched gap between German and Italian borrowing costs - an indicator of stress in Italian finances - hit its highest since March.
Global bond funds posted massive weekly outflows.
MSCI's gauge of stocks across the globe closed up 1.0%, while the pan-European STOXX 600 index rose 0.82%.
The Dow Jones Industrial Average rose 0.87%, the S&P 500 gained 1.18% and the Nasdaq Composite added 1.6%. The S&P 500 snapped a four-week losing streak.
Gold prices gained, helped by a technical rebound after a nine-day losing streak, though robust U.S. jobs data raised worries over another U.S. rate hike and kept bullion on track for its second weekly drop.
U.S. gold futures settled 0.7% higher at $1,845.20 an ounce.