The U.S. economy had another surge in new private sector hiring last month, payroll processing group ADP said Thursday, suggesting a firmly resilient labor market that could cement that Federal Reserve's case for further interest rate hikes over the coming months.
ADP said in its National Employment Report that private sector jobs grew by 497,000 last month, well ahead of Street forecasts of a 228,000 gain, using the new methodology developed last summer that ADP says provides a "more robust, high-frequency view of the labor market and trajectory of economic growth."
Wages gains for those staying at the same job slowed to 6.4%, ADP said, while gains for job-changers fell to 11.2%, the slowest since October of 2021.
In a separate report Thursday, the Labor Department said weekly jobless claims rose modestly to 248,000, just ahead of analysts' estimates of a 245,000 tally.
“Consumer-facing service industries had a strong June, aligning to push job creation higher than expected,” said ADP's chief economist Nela Richardson. “But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge."
Friday's May employment report, due at 8:30 am eastern time, is forecast to show a decline in hiring compared to the previous month, with 225,000 new positions created and monthly average hourly earnings easing to 0.3%.
U.S. stocks extended declines immediately following the data release, with the S&P 500 falling 59 points in the opening hours of trading and the Dow Jones Industrial Average down 3492 points pullback. The tech-focused Nasdaq was down 205 points.
Benchmark 10-year Treasury notes yields were last seen 10 basis point higher at 4.061%, the highest since early March, while 2-year notes surged past the 5% mark to 5.097%, the highest since 2007, before easing to 4.059%.
The U.S. dollar index was marked 0.169% lower at 103.173 against a basket of its global currency peers.
The CME Group's FedWatch now indicates a 96% chance of a 25 basis point hike later this month, up from 81.6% at the close of trading on June 30, with bets on another rate hike in November hovering at around 50%.
Minutes from the Fed's June policy meeting, where officials voted to pause their run of ten consecutive increases, noted that "almost all participants ... judged that additional increases in the target federal funds rate during 2023 would be appropriate."
The hawkish tenor, which echoed recent comments from Chairman Jerome Powell, has added upward pressure on Treasury bond yields and could prove crucial for U.S. stock performance.
"If the US 10-year yield breaks above 4% and marches on to challenge the previous cycle highs around the 4.25% it could change the dynamics in the US equity markets," Saxo Bank strategists wrote Thursday. "With rising bond yields a positive Q2 earnings season becomes more important to justify the current equity valuations under rising yields."
