(Bloomberg) -- Bond traders boosted expectations for one more Federal Reserve interest-rate hike in the wake of the latest jobs report, and are anticipating that the increase will most likely come in July.

The amount of tightening reflected in interest-rate swaps linked to the Fed’s June and July meetings climbed after data showed stronger-than-expected payroll growth for May, but a slower-than-forecast pace of wage gains and a jump in the unemployment rate. At one stage a quarter-point hike within the next two meetings was fully priced in. Investors also pared bets on how much subsequent policy easing they expect toward year-end following the anticipated peak of the tightening cycle. 

Ahead of the payroll report, Fed officials signaled that they plan to keep rates steady in June, while retaining the option to hike further in coming months. Governor Philip Jefferson, a centrist who’s nominated to be vice chair and who often echoes Chair Jerome Powell’s views, said Wednesday that skipping an increase would give policymakers time to assess data but not preclude future tightening.

The jobs report “will have markets debating on how the Fed will message their first skip of the hiking cycle,” said George Goncalves, head of US macro strategy at MUFG. “So long as the remaining data doesn’t derail things, the Fed will likely do a hawkish skip” in June and “suggest one skip doesn’t mean they are done,” Goncalves said.

Job Gains

Friday’s job report showed nonfarm payrolls increased 339,000 last month after an upwardly revised 294,000 advance in April. The unemployment rate rose to 3.7%, the highest since October, while wage growth slowed.

“There is something in this report for everyone,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “The increased layoffs are beginning to flow through. We don’t believe this number changes the dynamic for a skip at this month’s Fed meeting when looking at the fine details.”

Some 25 basis points of tightening were fully priced in across the next two meetings for part of the trading session Friday. Around 9 basis points was priced in for June, indicating a less than one-in-two chance of any hike being at this month’s meeting. Traders in the rate derivatives market at one stage saw the Fed’s policy rate peak at more than 5.33% in July, compared with a current effective rate of 5.08%.

Treasuries fell Friday, with shorter-dated securities leading the charge. The yield curve flattened, pushing the two-year rate 81 basis points above the 10-year, close to the deepest inversion since the March tumult in regional banks. 

All eyes will now turn to the consumer-price inflation reading that comes June 13, the day before the Fed’s next policy decision.

“My guess is that this will be consistent with a skip,” University of Chicago professor and former Fed Governor Randall Kroszner said on Bloomberg Television about the job report.


--With assistance from Liz Capo McCormick and Benjamin Purvis.

(Updates pricing throughout.)

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