The markets reacted sharply on Friday to the stronger than expected payroll number, with stocks selling off, bond yields rising and the U.S. dollar strengthening. February's change in nonfarm payrolls was 295,000 (versus an expectation of 235,000), and the unemployment rate dropped to 5.5% from 5.7% in January. The latest data continues the recent trend seen in employment and further supports the forecasters who believe the Federal Reserve (Fed) will increase interest rates in June.
We continue to believe that the Fed will need to weigh the risks of increasing interest rates at a time when the U.S. dollar continues to strengthen and inflation remains below its 2% target. These factors will make the Fed very data-dependent going forward. Do not underestimate the potential for the dollar's strength to change the Fed's timing as it weakens growth and lowers inflation in the intermediate term.
We expect the week ahead to have some follow-through on the action from Friday, with equities and bond prices continuing to decline and the dollar strengthening. Key levels to watch on the 10-year U.S. treasury are resistance at a yield of 2.38% and support at 2.12%.
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