(Recasts; adds ISM, GDP news; updates yields)
By Kate Duguid
NEW YORK, Feb 1 (Reuters) - January’s surge in U.S. job growth pushed Treasury yields up on Friday just days after the Federal Reserve expressed caution about further interest rate hikes this year.
The U.S. Labor Department’s closely watched nonfarm payrolls report showed employers hiring the most workers in 11 months, with no “discernible” impact on job growth from a 35-day partial government shutdown. However, the longest shutdown in history, which ended a week ago, pushed up the unemployment rate to a seven-month high of 4.0 percent.
The jobs report was not the only bullish signal. The U.S. ISM manufacturing index rose more than consensus estimates in January in spite of the ongoing trade war with China which has capped growth in the manufacturing sector.
Friday’s strong data led to a large increase in the quarterly growth forecast put out each week by the New York Fed. The estimated rate of expansion for the first quarter bounced to 2.39 percent from 2.17 percent last Friday.
These results come two days after the Fed signaled it may pause hiking interest rates because of softness in the economy and financial market volatility. The longevity of the U.S. economic expansion, now in its ninth year, has come into question as the shutdown and trade war have begun to weigh on business and consumer confidence.
“If the Fed’s message on Wednesday was a dovish reaction to the data, well even in the last few days, the data has improved,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
“The question for financial markets over the next few trading sessions is whether the dovish outlook from the Fed was a reaction to data inputs or whether it represents a new reaction function to the same data.”
Two-year yields, which reflect traders’ expectations of interest rate hikes, rose 5.8 basis points to 2.52 percent, with the 10-year yield up 5.8 basis points to 2.69 percent.
Following Friday’s report, traders trimmed their rate-cut bets. Contracts tied to the Fed’s policy rate had priced out any chance of a 2019 interest rate hike after Fed Chairman Jerome Powell on Wednesday said the case for rate increases had weakened. After Friday’s report, traders reduced rate-cut bets, though they continue to bet against a hike.
With key data from the Commerce Department, including the fourth-quarter gross domestic product report, still delayed because of the shutdown, the employment report was the clearest evidence yet that the economy remains on solid ground.
Reporting by Kate Duguid; Editing by Andrea Ricci