US stocks have been hit by the news that America’s jobs market was much stronger than expected in December.

The Dow Jones Industrial Average, of 30 large US companies, has dropped by 313 points or 0.73% at the start of trading to 42,322 points.

The broader S&P 500 index is down 1%, while the tech-focused Nasdaq has lost 1.3%.

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, says:

US nonfarm payroll was surprisingly robust, to the point where such “hot” data is likely perceived to be “bad news” for markets. While the ongoing resilience in the job market is welcomed, markets have recently shifted to focus more on inflation concerns and rising bond yields. The exceptionally strong US jobs gain in December, together with the prospect of pro-growth policies and tariffs by the Trump administration, will exacerbate concerns on inflation. This casts doubt on whether the Federal Reserve can cut interest rates at all in 2025. The rise in bond yields also caused some nervousness in the equity market, even though a strong economy is good for corporate profits.

This is further bad news for the UK Chancellor, as UK bond yields further rose alongside global yields today. While the moves are affected by US data, the rise in borrowing costs will put further strain on UK’s fiscal position and hence attract intensifying scrutiny on the government.

The US labor market expanded strongly in the last jobs report of the Biden administration, according to new data released on Friday.

The number of new jobs added to the economy accelerated to 256,000 in December, up from 227,000 in November, soaring past expectations. The labor market last month was bolstered by new jobs in healthcare, retail and government.

As the final jobs report of his administration, it’s a blowout for Joe Biden, who struggled to rally support around his economic agenda despite the economy strengthening after the pandemic.

Other data points released in the last week pointed to strength in the labor market. The Jobs Openings and Labor Turnover Survey (Jolts) showed that job openings topped 8m in November, soaring past expectations.

Another report from outsourcing firm Challeger, Gray & Christmas reported a 33% decrease in layoffs in private firms in December, going from around 57,000 cuts in November to 38,000 layoffs in December.

The market reaction to today’s strong US jobs report is a sign that the peak in government bond yields has not been reached, yet, warns Seema Shah, chief global strategist at Principal Asset Management.

That is bad news for the UK, as Shah explains:

“The important payroll beat will be good news for the U.S. economy and the US dollar, unwelcome news for equities as they seek interest rate relief, and punishing news for global bond markets, particularly UK gilts.

U.S. labor market strength is clearly a continuing theme and suggests that the economy continues to thrive. The Fed can be very comfortable staying put in January and will need some meaningful downside inflation surprises or reversals in upcoming jobs reports to wake them from rate slumber in March.

For global bonds, the strength of the U.S. jobs report just adds to their challenges. The peak for yields has not yet been reached, suggesting additional stresses that several markets, especially the UK, can ill afford.”

The UK bond market crisis is bursting back into life too.

UK bond yields have jumped as investors calculate that the strong US jobs report reduces the chances of interest rates cuts in America, and quite possibly the UK too.

The yield on 30-year UK gilts has gained another 7 basis points (0.07 percentage points) today to 5.437%, towards the 26-year high seen on Thursday.

Ten-year gilt prices are also weakening, driving up yields on those bonds by 8 basis points to 4.88%, near to the highest since 2008.

Newsflash: the US economy added many more jobs than expected last month, a development that has hammered the pound.

Non-farm payrolls rose by 256,000 in December, the U.S. Bureau of Labor Statistics has reported today. That smashes forecasts of a 160,00 increase, and has pulled the US unemployment rate down to 4.1%, from 4.2%.

Employment trended up in health care, government, and social assistance, and retailers also added jobs in December, the BLS reports.

This indicates the US labor market is in a stronger position than expected – good news for Donald Trump as he prepares to be sworn in as US president later this month.

BUT it will make it harder for the US Federal Reserve to justify cuts to interest rates.

As a result, the dollar is rallying – and this has sent the pound plunging by a whole cent to $1.22, the lowest since November 2023.

The Government has said it’s confident the UK has enough natural gas supplies to make it through the winter, following Centrica’s warning that storage levels are ‘concerningly low’ (see 11.55am).

A spokesman for Downing Street has said.

“We are confident we will have a sufficient gas supply and electricity capacity to meet demand this winter, due to our diverse and resilient energy system.

“We speak regularly with the national energy system operator to monitor our energy security, and ensure they have all tools at their disposal if needed to secure our supply.

“Our mission to deliver clean power by 2030 will replace our dependency on unstable fossil fuel markets with clean, homegrown power controlled in Britain, which is the best way to protect bill payers and boost our energy independence.”

Reports the UK has been on the verge of an energy blackout are “not true”, the spokesman added.

The sell-off in UK government debt this year is going to hurt economic growth, economists at Goldman Sachs have warned.

Goldman Sachs fears that the jump in gilt yields will hurt households who need to remortgage home loans, and deter businesses from borrowing to investing.

Analysts James Moberly and Sven Jari Stehn explains:

Gilts have sold off materially, with 10-year yields up 24bp to 4.81% since the start of the year and around 100bp since September, reaching the highest level since 2008.

We expect higher yields to act as an additional headwind to growth via household remortgaging and weaker investment, with the increase of the last few days worth around 0.1pp of additional growth drag this year.

Moberly and Stehn add that the rise in gilt yields reinforces their view that UK growth will disappoint in 2025.

They forecast UK growth of just 0.9% this year, which they say is “notably below consensus (1.4%), the Bank of England (1.5%) and the Office for Budget Responsibility (2%).”

According to research by the property company Savills, about 690,000 homeowners who are on three-, four-, five-year or longer deals that are up for renewal in 2025 will face increases in their monthly payments. Of these, the vast majority, 575,000, are on five-year deals.

The UK’s winter gas storage levels have dropped to “concerningly low levels” following the ongoing cold snap, energy provider Centrica has warned.

Centrica has revealed that as of yesterday, the UK has less than a week of gas demand in store, as a spike in energy demand due to the freezing weather put pressure on gas reserves.

UK storage sites are 26% lower than last year’s inventory at the same time, Centrica reports, leaving them around half full.

Centrica, the owner of British Gas, says:

The UK’s gas storage is under pressure this winter as the UK battles both extreme cold and high gas prices. The ongoing colder-than-usual conditions in the UK combined with the end of Russian gas pipeline supplies through Ukraine on 31 December 2024 has meant that gas inventory levels across the UK are down.

But, the situation is echoed across Europe, where people are also shivering. On 7 January, European storage was at 69% capacity, down from 84% at the same time the previous year, Centrica reports.

Centrica is also arguing that the UK needs more long-duration energy storage, to help balane the system as it becomes increasingly reliant on renewables

Chris O’Shea, Group CEO at Centrica, says:

“Energy storage is what keeps the lights on and homes warm when the sun doesn’t shine and the wind doesn’t blow, so investing in our storage capacity makes perfect economic sense. We need to think of storage as a very valuable insurance policy.”

Although the markets for US assets are calmer today than earlier in the week, there’s a palpable nervousness in the City about the outlook for gilts and the pound.

Mark Dowding, BlueBay CIO at RBC BlueBay Asset Management, says his firm takes a negative view on UK assets:

Dowding explains:

Politically, the official growth forecast for 2025 (2%) is already looking ambitious and is likely to be re-rated lower in March, adding to spiralling deficit concerns.

Higher borrowing costs are feeding back into a deteriorating fiscal profile, and there is a growing sense that the Labour government will break its own fiscal rules and be forced to renege on its promise not to raise taxes further, given the high sensitivity around additional borrowing and cuts to public spending.

RBC BlueBay remains bearish on UK assets as the firm continues to envisage a fiscal and political downward spiral.

Deutsche Bank are recommending selling the pound “on a broad, trade-weighted basis,” explaining that sterling has lost recent sources of support.

Deutsche’s Shreyas Gopal says:

The current account deficit is likely no longer improving, and volatility-adjusted yield pickup appears at risk of worsening further.

Update: Deutsche also say:

“With the trade-weighted sterling index still sitting just over 2% off its post-Brexit highs, we think there’s further to go in the recent pound weakness.”

The jump in UK borrowing costs has not, yet, fed through to mortgage rates, it seems.

Data provider Moneyfacts has reported that the average rates for fixed-term mortgages are unchanged today.

They report:

The average 2-year fixed residential mortgage rate today is 5.47%. This is unchanged from the previous working day.

The average 5-year fixed residential mortgage rate today is 5.25%. This is unchanged from the previous working day.

This means the average two-year fixed rate is the same as on Monday, while five-year fixed rates are just 0.01 percentage point higher this week.

Fixed-rate mortgages are priced off the yields on government bonds, so if this week’s rises are sustained, lenders might have to raise rates….

UK bond yields are moving a little higher, though we’re still below the peaks hit yesterday.

The yield on 10-year gilts is now up four basis points (0.04 percentage points) to 4.839%, while 30-year gilt yields are 3.5bps higher at 5.4%.

In normal times, these would not be newsworthy moves, but as 10-year borrowing costs hit the highest since 2008 this week, there’s much more scrutiny than usual.

Michael Brown, senior research strategist at Pepperstone, says:

There remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in Gilts, and the anaemic nature of UK economic growth.

Rachel Reeves may have to consider ‘very severe’ spending cuts if the recent rise in UK borrowing costs eats away at her fiscal headroom, a former Bank of England deputy governor has warned.

Sir John Gieve told Radio 4’s Today Programme that the recent bond market turmoil was not in response to UK policy changes – instead, he argues, gilt yields have simply been following the US market.

Gieve says:

This is very different from the Truss debacle, in that it’s not a response to anything we’ve done in the UK.

Gieve explains that the UK’s long-term borrowing costs tend to follow US government debt (Treasury yields have risen as investors have anticipated higher inflation under Donald Trump).

Gieve says the UK is “a bit more vulnerable” to bond market moves, as it already spends over £100bn per year on debt interest, and last autumn’s budget showed a marked increase in borrowing over the next few years.

Yesterday, Treasury minister Darren Jones insisted repeatedly that the UK was fully committed to its fiscal rules, to reassure markets.

Gieve says, though, that it is becoming “clearer and clearer” that this will be “very difficult”, and require a lot of “new, difficult, decisions”.

That’s because October’s budget showed a substantial increase in spending this year, but then a slowdown to a little over 1% per annum in subsequent years.

So, if health and defence spending have to rise by more than 1%, this will require cuts in many other programmes, and those have not been announced.

Gieve says:

“The choice she [Rachel Reeves] is going to face in the spending review [due in June] and then the budget in the autumn, is ‘can I raise borrowing?’ – and the increase in interest rates that’s happened now, if it continues, will decrease her scope for doing that within her rules.

‘Or do I increase taxes again?

Or do I actually institute some very severe reductions and squeezes on public services?’”

The bottom line, Gieve adds, is that if the UK economy doesn’t grow by much more than 1%, we can’t afford to increase spending by much more than 1%.

That’s why growth is so important, but recent figures have been “discouraging”.

A burst in housebuilding might provide a short-term boost to growth, he suggests.

The City seems unimpressed by Sainsbury’s financial results, even though it reported sales growth ahead of the wider market for seven consecutive quarters.

Sainsbury’s are the top faller on the FTSE 100 share index at the start of trading, down 2.5%.

Investors may be disappointed that Sainsbury’s didn’t lift its profit forecasts today.

Instead, the company says it expects to meet forecasts for underlying operating profits, and hit the midpoint of its guidance range of £1.01bn to £1,06bn.

All eyes are on the UK government bond market today, where the current bond market selloff has been particularly acute.

And in early trading, bond yields are nudging slightly higher, although it’s a small move.

The yield (or interest rate) on 10-year UK gilts is up 2 basis points, or 0.02 percentage points, at 4.82%.

Long-dated 30-year UK bond yields are almost 2bp higher, at 5.38%.

Jim Reid, market strategist at Deutsche Bank, says:

The global bond selloff showed few signs of letting up over the last 24 hours, with long-term borrowing costs continuing to move higher across the board.

The UK was particularly in the spotlight, as its 10yr gilt yield (+1.5bps) hit another post-2008 high of 4.81%, whilst the 30yr yield (+2.2bps) hit a post-1998 high of 5.37%. But even though the UK might appear the most striking in terms of when yields last traded at these levels, other countries have experienced a similar pattern too.

For instance, the French 10yr yield hit its highest since October 2023, whilst the German 10yr bund yield hit its highest since July. In the meantime, US Treasuries showed some signs of stabilising, but even there the 10yr yield is still at 4.69% this morning, on track to close at its highest level since April, and Japan’s 10yr yield is at its highest since 2011.

UK unions have welcomed Sainsbury’s decision to lift pay by 5% next year, matching the Real Living Wage.

The move means pay will increase by over £1,100 a year for full time hourly-paid colleagues by August, the grocer reports.

The Usdaw union says it’s only right that staff are fairly rewarded with a living wage.

Bally Auluk, Usdaw National Officer, says:

“The working relationship between Usdaw and Sainsbury’s continues to strengthen, and we are pleased that the company has again worked closely with our Union’s representatives, during the recent pay consideration meeting.

The business has decided to make a pay award totalling 5 per cent, despite lower inflation rates than last year and following on from previous significant pay increases.

The cost of living continues to be a key concern for our members, so the business’ decision to respond in such a positive manner, by matching the Real Living Wage once more, is a welcome one for our members.”

The pound is a little weaker this morning, but higher than the lows touched during Thursday’s choppy trading.

Sterling has dipped by a third of a cent to $1.227 in early trading, towards the 14-month trough touched yesterday.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, fears the pound is set for a deeper selloff, as investors note that chancellor Rachel Reeves is losing her fiscal headroom as borrowing costs rise.

Ozkardeskaya explains:

The UK – which has a huge debt, dismal productivity and growth and a thick layer of unnecessary regulation like continental Europe – still has a debt-to-GDP level lower than other developed economies like France, Italy, Spain and Japan! But the country faces relatively tougher market reaction to its political decisions.

I have the feeling that investors somehow continue to blame the UK for its decision to quit the EU.

But anyway, the selloff in gilts and the pound may have cooled down yesterday, but cost of boosting growth has become significantly more expensive for the UK government, meaning that we may not see the UK perform as well as it did last year. And that sets the pound outlook negative at the early weeks of the new year.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Sainsbury’s is to hike the wages of staff across its supermarket by an inflation-busting 5%, after reporting its “biggest ever Christmas”.

The UK’s second-largest grocer has just announced it will raise pay for its hourly-paid colleagues by 5% over the next year, meaning staff will continue to receive the real Living Wage, which is higher than the national minimum wage.

Simon Roberts, chief executive of J Sainsbury plc, says:

“Our people are fundamental to achieving our Next Level Sainsbury’s plan and we are pleased to announce that we will raise pay for our hourly-paid colleagues by five per cent in the year ahead, split into two separate increases to help manage a particularly tough cost inflation environment.

We believe in rewarding our colleagues well for delivering leading service and productivity and we will be the best paying UK grocer from March.”

The increases will come in March, and in August.

It means pay for hourly-paid staff at Sainsbury’s and Argos will increase to £12.45 per hour in March and then £12.60 per hour by August, matching the Real Living Wage

Pay for those in London will rise to £13.70/hour in March, and again to £13.85 in August.

Pay rises are welcome news for UK workers who have struggled through a long cost-of-living squeeze. But they cause anxiety at the Bank of England, which fears that rising wages could fuel inflation, above its 2% target.

Yesterday, bakery chain Greggs said two-thirds of its workers were handed a 6.1% pay rise this month.

Sainsbury’s also reported that it won grocery market share for the fifth consecutive Christmas, with like-for-like sales up 3.8% in the six week’s to 4th January.

Its Argos business lagged, though, with comparible sales up 1.1% in the eight weeks to 4th January.

It appears that Sainsbury’s benefitted from a last-minutes day to the shops.

Roberts says:

Customers shopped later than ever and we achieved our highest ever sales in the final days before Christmas.

Also coming up today

It’s a big day for global investors, as December’s US payrolls report is released – showing how many new jobs were created last month.

A strong jobs report might drive up the US dollar, and weaken US debt, with a potential knock-on impact on other government debt too.

UK government bonds are also in the spotlight after a turbulent week, in which Britain’s borrowing costs hit their highest level in decades. The market calmed a little yesterday, but anxiety over the UK’s fiscal outlook remains high.

The chancellor, Rachel Reeves, has travelled to China in an attempt to build closer economic ties with Beijing, despite calls from opposition parties to stay home and tackle the turmoil in the markets.

As the Guardian reported last night, Reeves is considering imposing steeper cuts to public services to repair the government’s finances, rather than raising taxes or borrowing.

The agenda

• 7.45am GMT: French industrial production data for November

• 1.30pm GMT: US non-farm payroll jobs report for December

• 3pm GMT: University of Michigan’s US consumer sentiment index for January