Europe's Markets Roiled as U.S. Payrolls Climb Most This Year

  • Euro, pound drop to lowest levels since April versus dollar
  • European government bonds decline, stocks jump after data

The U.S.’s best jobs report this year jolted currency, bond and stock markets across Europe, with the better-than-expected data bolstering speculation the Federal Reserve will raise interest rates next month.

The pound and euro both tumbled to the lowest levels since April against the dollar as the U.S. Labor Department said the nation added 271,000 jobs last month, following a revised increase of 137,000 in September. The median forecast in a Bloomberg survey of economists was for an addition of 185,000. German 10-year bund yields climbed to the highest level in seven weeks after the report, while stocks reversed earlier declines.

“This makes it almost a done deal for the Fed,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. This report is “bearish for fixed income clearly and positive for the dollar. History suggests that bond yields rise the most in the last two months ahead of a first Fed hike, so being short duration in bonds makes sense at the moment.”

The pound slid 1.1 percent to $1.5040 as of 5:31 p.m. London time, after earlier touching $1.5029. The euro fell as much as 1.6 percent to $1.0707.

Germany’s 10-year bund yields increased nine basis points, or 0.09 percentage point, to 0.69 percent, and touched 0.70 percent, the highest since Sept. 18. The 1 percent security due in August 2025 fell 0.83, or 8.30 euros per 1,000-euro face amount, to 102.885.
Similar-maturity Italian bonds declined for a seventh day. The yield on U.K. 10-year gilts climbed as much as eight basis points to 2.05 percent, the highest since July 22.

The increasing prospects of a December move from the Fed underscores the diverging paths of monetary policy in Europe and the U.S. The yield difference between U.S. and German two-year notes, the securities most sensitive to changes in policy, was already at the widest since 2006 before the data, after European Central Bank President Mario Draghi reiterated on Tuesday the institution will consider increasing stimulus at its meeting the same month. The spread widened a further four basis points on Friday, to 118 basis points.

The yield gap between the nations’ 10-year debt was at 163 basis points, compared with as much as 190 basis points in March.

‘Exceptional Times’

“We are living in exceptional times when the two central banks move in opposite directions,” said Martin van Vliet, ING Groep NV’s senior interest-rate strategist in Amsterdam. “I like to look at the 10-year Treasury-bunds spread. The 10-year bund yield is also dragged higher now and my guess is that we’re going to see some 10-year Treasury-bund spreads widening going forward.”

Traders now see a 70 percent chance that the Fed will raise its benchmark rate from near zero at its next meeting, up from a 56 percent probability before Friday’s U.S. labor data. The calculation assumes the effective fed funds rate averages 0.375 percent after the first hike.

The Stoxx Europe 600 Index of shares added 0.3 percent after earlier falling as much as 0.7 percent.

“It leaves the door wide open to a rate hike,” said Espen Furnes, who helps oversee $75 billion at Storebrand Asset Management in Oslo. “European stocks are jumping as it’s easy to see why the U.S. dollar will continue to strengthen against the euro.”

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