by Michael Mackenzie and Ye Xie
Investors in US Treasuries will scour employment data Friday for clearer evidence of a hiring slowdown that could open the door to the Federal Reserve cutting interest rates in September.
While the pace of hiring has been slowing since April, the US central bank left policy rates steady on Wednesday and Chair Jerome Powell said the jobs market was “in balance” when explaining why policymakers remain on the sidelines.
Given a lengthy calendar of data to come — including two employment and inflation reports — the chances of a September cut remain live. On that point, Powell qualified his remarks when he said, “you don’t see weakening in the labor market, but you have downside risks.”
So far this week, with other labor-related data suggesting the economy is holding up amid a noisy backdrop of tariffs and trade negotiations, the bond market has reduced expectations for rate cuts this year.
Odds for a quarter-point of easing in mid-September have slid below 40% and traders also no longer fully price a rate cut at the Fed’s meeting in October. Treasury yields are higher on the month, led by a 24 basis-point rise in the policy-sensitive two-year note and leaving the broad market with only its second negative month for the year.
So as August begins, the case for adding or reducing exposure to Treasuries at current levels rests with the July jobs report. There hasn’t been an especially pronounced slide in the pace of hiring. That’s confounded a bond market clinging to pricing in around 100 basis points of cuts over the next year.
“The shoe that the market has consistently been waiting to drop is labor hiring,” said Amar Reganti, fixed-income strategist at Hartford Funds. “It’s been cooler, but still resilient.”
The jobs report has often been the most influential piece of economic data for bond traders in recent months, generating chunky moves.
Two-year yields, which are the most sensitive to the Fed’s policy, have moved an average 10 basis points on the day of the payroll releases over the past year, twice the size of movements on the days of consumer price index releases.
The jobs numbers also have the power to shape the path of Fed rate cuts and those expectations have waxed and waned since December. But policymakers’ median forecast — which didn’t change in March and June — was that the band would decline to 3.75% to 4% by the end of the year, implying two quarter-point cuts.
Friday’s report is forecast to show growth in the workforce easing to 104,000 new jobs from a rise of 147,000 the prior month, according to economists surveyed by Bloomberg.
Beyond headline jobs, a more important figure is the unemployment rate that is forecast to nudge up to 4.2%, after it unexpectedly dipped to 4.1% in June. The measure is seen as being caught between slowing demand and a drop in labor supply amid the US immigration crackdown.
“Friday’s report is very important, but more than the payroll number, I think we will be focused on the unemployment rate,” said Priya Misra, portfolio manager at JPMorgan Investment Management. “For the Fed to cut in September, there needs to be clear evidence of the weakening in the labor market.”
“Survey estimates for today’s payrolls suggest a bigger surprise is more likely, leading to a potentially outsized reaction in rates and bond markets due to low volatility. Yields are fairly unperturbed by the latest tariff announcements, but they may not remain so after today’s jobs data.”
—Simon White, Macro Strategist.
Beyond the latest jobs figures, the bond market still needs to see cooling inflation over the next two months to help convince enough central bank officials to follow through on their projected two quarter-point cuts forecast in June.
“On the labor market, a core justification for the Fed’s easing bias is its view that the demand for workers is weakening in line with the reduction in labour supply from immigration,” said Jean Boivin, head of the BlackRock Investment Institute.
“This creates the potential for a hawkish surprise if payroll growth does not ease enough to match the cooling growth in the US workforce,” he said. That’s “something we will zero in on with Friday’s U.S. jobs data,” he said.
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