(Bloomberg) -- Traders in the US rates market pared their bets on the amount of policy tightening they expect from the Federal Reserve after fresh jobs data that showed an uptick in the unemployment rate and the pace of wage growth remaining steady, although the drive toward higher borrowing costs remains very much intact.
The pullback follows a runup in expectations recently that’s been fueled by hawkish commentary from Federal Reserve officials and relatively upbeat economic data.
Traders trimmed the amount of rate-hike premium priced in for the upcoming decision on Sept. 21 by 2 basis points to 65 basis points, suggesting that a 75-basis-point increase is still seen as the more likely outcome than a move of 50 basis points, but slightly less so than before the labor market data. The expected peak for the Fed target this cycle was also trimmed slightly.
“It’s just one number so we wouldn’t want to go to far, but it’s consistent with where the Fed wants to go,” said former Fed Governor Randall Kroszner, now a University of Chicago Booth School of Business professor. “It has made markets somewhat happy as they were worried it could have been a blow out report here,” he told Bloomberg Television.
Front-end Treasuries gained in the wake of the data, pulling down the yield on the two year benchmark by 5 basis point to 3.45%, while the 10-Year slid by less than a basis point to 3.25%, steepening the curve. The Bloomberg dollar index briefly extended its decline for the day, although it remains close to an all-time high, while US stock futures bounced.
Nonfarm payrolls increased 315,000 last month following a revised 526,000 advance in July, a Labor Department report showed Friday. The unemployment rate unexpectedly rose to 3.7% as the participation rate climbed. Year-on-year growth in average hourly earnings was at 5.2%, the same as the prior month and slightly below the median estimate of economists.
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