Non-farm payrolls far exceeding expectations + Middle Eastern conflict intensifies: Japan's 10-year government bond yield rises above 2.7%, forcing the Fed to bet on interest rate hikes

U.S. May non-farm payrolls surge by 172k, far exceeding market expectations; rising tensions in the Middle East boost oil prices, igniting market bets that the Federal Reserve (Fed) will restart rate hikes this year. Japan’s 10-year government bond yields followed U.S. Treasuries higher on Monday, temporarily breaking through the 2.7% level.
(Background recap: Trump: Wants to cut rates but “leaves it to Warren” for decision-making! Inflation at 3.8%, non-farm payrolls double, 96% betting on rate hikes by year-end)
(Additional context: “The Doomsday Doctor” Roubini: Trump is very likely to “upgrade the war on Iran”! A rebound in inflation could force the Fed and the European Central Bank to hike rates)

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• Employment soars by 172k; Fed rate-hike expectations fully reignite
• Middle East fighting boosts oil prices; inflation expectations worsen
• Japanese government bonds follow U.S. Treasuries higher; the BOJ may hike rates again this month

The U.S. May non-farm employment report thoroughly crushed expectations. Coupled with Iran’s recent launches of multiple missiles at Israel and the rapid escalation of tensions in the Middle East, the twofold shock pushed global bond markets lower. Japan’s 10-year government bond yields on Monday (June 8) followed U.S. Treasuries higher, at one point rising to 2.715%, the highest level in more than a week.

Employment surges by 172k; Fed rate-hike expectations fully reignite

Data released by the U.S. Bureau of Labor Statistics (BLS) last Friday showed that non-farm payrolls jumped by 172k in May, far outperforming economists’ forecast of 85k, while the unemployment rate stayed steady at 4.3%. This is the first non-farm report after the new Fed Chair Kevin Warsh took office. Markets interpret it as evidence that the labor market remains overheated enough to support further monetary tightening by the Fed.

After the data was released, Treasury yields rose across all maturities. According to The Wall Street Journal, the 2-year Treasury yield—most sensitive to expectations for Fed policy—jumped to 4.160%, a one-year high. Goldman Sachs’ chief U.S. economist David Mericle has already announced that he is withdrawing his forecast for the Fed to cut rates this year, arguing that the resilience of the labor market has completely eliminated any room for rate cuts.

Fighting in the Middle East boosts oil prices; inflation expectations further worsen

In addition to the rate-hike pressure generated by employment data, geopolitical developments also add more variables to the inflation outlook. Iran has recently launched multiple missiles toward Israel, as a warning in response to Israel’s military actions in Lebanon; the move has pushed up international oil prices and intensified concerns about disruptions to supply chains.

As risk-aversion sentiment heats up and expectations of higher energy costs strengthen, it further reinforces market bets on Fed rate hikes during this year. According to Seeking Alpha, the interest rate futures market has pushed up the probability of rate hikes before year-end to an extremely high level, completely reversing the broad market expectations for rate cuts earlier in the year.

Japanese government bonds follow U.S. Treasuries higher; the BOJ may hike rates this month as well

Amid a chain reaction from heavy selling in U.S. Treasuries, Japan’s 10-year government bond yields rose by 5 basis points on Monday to 2.715%, the highest level in more than a week. Analysts said expectations that the interest-rate spread between the U.S. and Japan will narrow, along with the transmission of global inflation pressures, are pushing Japan’s long-dated government bond yields higher.

In addition, the Bank of Japan (BOJ) is widely expected to hike rates again later this month to address persistent inflationary pressure driven by elevated energy prices. The latest data shows Japan’s Q1 GDP growth accelerated from 0.2% in the prior quarter to 0.5%. Japan’s current account surplus in April also came in better than expected. With export growth continuing to outpace imports, it provides the BOJ with additional confidence to tighten monetary policy further.

Markets are closely watching this week’s U.S. CPI data and remarks from Fed officials to gauge the specific timing and magnitude of future rate hikes.