Traders expect U.S. rate hike in June, shrug off weak payrolls data

By Richard Leong

NEW YORK (Reuters) - U.S. interest rate futures rose modestly on Friday, as traders still expect the Federal Reserve to raise key borrowing costs at its June 12-13 policy meeting in the wake of weaker-than-forecast growth in domestic payrolls and wages in April.

Nonfarm payrolls increased by 164,000 last month, below the 192,000 gain forecast by analysts in a Reuters poll. Average hourly earnings grew 0.1 percent, less than the 0.2 percent increase expected by economists.

While these labor figures fell short of expectations, the jobless rate fell more than forecast to 3.9 percent in April, which was a near 17-1/2 year low. The March payrolls increase was revised higher.

Overall, the latest jobs data supported the case for the Fed to stay on its gradual rate-hiking path, analysts said.

On Wednesday, the Federal Open Market Committee, the central bank's policy-setting group, left its target range on short-term rates at 1.50-1.75 percent. It showed confidence inflation is closing in on the Fed's 2-percent goal.

"I think this does nothing to change the Fed," said Chris Gaffney, president of world markets at EverBank in St. Louis, Missouri. "It will hike in June. The economy is healthy but not overheating."

At 10:14 a.m. (1414 GMT), federal funds futures implied traders saw a 100 percent chance that the Fed will raise overnight costs for banks to borrow excess reserves from one another by a quarter point to 1.75-2.00 percent, CME Group's FedWatch program showed.

Fed funds futures suggested traders priced in about a 71 percent of another quarter point hike in September.

Traders seem less certain about a fourth rate increase in 2018. Rates futures implied nearly a 42 percent likelihood of such a move, according to CME's FedWatch.