November 2, 2018 / 1:39 PM / 19 days ago

TREASURIES-Modest wage gains constrain yields despite job growth

(Adds detail on report, Fed; updates yields)

By Kate Duguid

NEW YORK, Nov 2 (Reuters) - Modest wage gains constrained U.S. Treasury yields on Friday despite an otherwise strong payrolls report that showed job growth rebounded sharply in October, pointing to further labor market tightening that could encourage the Federal Reserve to raise interest rates again in December.

The Labor Department’s closely watched monthly employment report showed that wage growth slowed in October, despite recording the largest annual gain in 9-1/2 years.

Average hourly earnings rose five cents, or 0.2 percent, in line with expectations after advancing 0.3 percent in September. That boosted the annual increase in wages to 3.1 percent, the biggest gain since April 2009, from 2.8 percent in September.

“These were excellent job growth numbers and excellent revisions. Inside the wage growth figures, you now have this annualized growth rate above 3 percent. So, we’ve got almost exactly what we expected without a blowout in wage growth,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

The report also showed the unemployment rate steady at a 49-year low of 3.7 percent even as more people entered the labor force. Sustained labor market strength could ease fears about the economy’s health following weak housing data and stalling business spending. Nonfarm payrolls increased by 250,000 jobs last month as employment in the leisure and hospitality sector bounced back after being held down by Hurricane Florence, which drenched North and South Carolina in mid-September.

The benchmark 10-year government note yield was last at 3.172 percent, up about one basis point from the announcement. Yields at the short end of the curve, which reflect traders’ expectations of interest-rate hikes, rose faster than those at the long end. The yield on the two-year note was up 2.4 basis points, last at 2.891 percent, flattening the yield curve following the report.

Firming wages support views that inflation will hover around the Fed’s 2.0 percent target for a while. The personal consumption expenditures price index excluding the volatile food and energy components has increased by 2.0 percent for five straight months.

The Fed is not expected to raise rates at its policy meeting next week, but analysts believe October’s strong labor market data could spur the Fed to signal an increase in December. The Fed raised borrowing costs in September for the third time this year.

Traders’ expectations that the Fed will raise rates in December jumped to 72.1 percent on Friday from 68.8 percent on Thursday, according to CME Group’s FedWatch tool.

Reporting by Kate Duguid; Editing by Bernadette Baum and Susan Thomas

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