US jobs surge sends dollar soaring

The dollar soared and bond yields spiked as hiring by US employers smashed Wall Street expectations and sparked heightened speculation that the Federal Reserve is nearing its first interest-rate rise in nearly a decade.

Employers added 295,000 jobs in February in defiance of bad weather and the unemployment rate fell to 5.5 per cent, the lowest level since 2008.

The US has now seen its longest streak of monthly jobs gains above the 200,000 mark in 20 years. Yet markets have focused on sluggish wage growth as they argue that the Fed will hold fire rather than rushing to raise official interest rates.

February’s job gains led to a sharp reassessment of that view. The dollar, which was already up 0.5 per cent against the euro before the jobs report, extended its gains to 1.6 per cent, with declines in emerging market currencies and bonds gathering pace.

This is a wake-up call for the markets. They had been behind the Fed and are now catching up

The resurgence in the US contrasts sharply with the performance of other key economies. The European Central Bank is about to embark on bond purchases as it seeks to crank up euro area growth, Japan is continuing to battle against deflation, and China this week cut its growth target to 7 per cent.

Investors exited positions across the Treasury yield curve — with heavy selling hitting interest rate sensitive two-year notes as well as longer-dated maturities including the seven-year note and 30-year bond. The yield on the 10-year Treasury, which moves inversely to its price, soared 13 basis points to 2.24 per cent, its highest level since December.

“This is a wake-up call for the markets,” said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh. “They had been behind the Fed and are now catching up.”

The US northeast was hit by snowstorms during the month, with Boston seeing its snowiest month on record but the adverse conditions did not appear to impair recruitment.

Hiring was led by restaurants and bars, professional business services, building and healthcare. A falling oil price took its toll on the drilling sector, as mining jobs dropped 9,000.

The rate of unemployment fell from 5.7 per cent to 5.5 per cent, edging the labour market ever closer to Federal Reserve officials’ estimates of full employment and heightening pressure for rate increases.

The US has seen the longest streak of private sector job gains on record, with 12m jobs added over 60 straight months and last year was the best for jobs growth since 1999. Over the past year, the number of unemployed people is down 1.7m, while the number of long-term unemployed has fallen 1.1m.

Through the gains the Fed has held its official interest rate at near-zero levels as it seeks to support a recovery that is still missing one key element: stronger wage growth.

Average hourly earnings for all employees on private non-farm payrolls were up 3 cents on the month but compared with a year ago they grew 2 per cent, down from January’s 2.2 per cent.

The central bank has been pledging to be “patient” before raising rates but that assurance is likely to be dropped this month. The question is how soon higher rates will follow given those persistently muted wages.

Paul Dales of consultants Capital Economics argued that the central bank could not afford to wait much longer given the speed of the recovery. “If the Fed waits until wage growth rises, they will be well behind the curve,” he said.

However, according to some economists the low wage growth points to hidden slack in the labour market that may not be reflected in headline unemployment figures.

The labour force participation rate, which has been relatively flat after tumbling during the recession, was little changed at 62.8 per cent in February, suggesting that many Americans are staying on the sidelines of the jobs market rather than seeking work.