Bond traders seeking support for bets that the Federal Reserve will cut interest rates later this month will closely watch Friday’s US employment report for November.
The monthly snapshot of the labor market arrives as the market-implied odds of a quarter-point rate cut at the central bank’s Dec. 18 meeting hovers around 65%, with about 82 basis points of easing priced in by the end of next year.
Treasury yields across the curve remain well above their sub-4% levels in mid-September when the Fed began easing, as expectations for sweeping rate cuts in the next 12 months have been wound back amid better data reports. The Fed began easing rates in September and has lowered its policy setting by 75 basis points to a band of 4.5%-4.75%.
“The bar is particularly high for a stronger-than-expected payrolls report to derail a rate cut,” BMO Capital Markets Vail Hartman wrote in a note, noting that investors have been warned by policymakers that payrolls “could be misleading.”
Hurricanes and strikes resulted in just 12,000 new hires for October. A rebound is expected for November with a Bloomberg survey of economists forecasting 220,000 new jobs, with the unemployment rate holding at 4.1%. Traders will focus on revisions for prior months and also the pace of earnings, with wages forecast to ease slightly to a 3.9% year-over-year pace.
“Revisions have been the story of 2024, so you should keep an eye on just how much the strikes and hurricane data will feed back in,” said George Catrambone, head of fixed income at DWS Americas.
Catrambone said 150,000 to 200,000 new jobs is “a sweet spot and a 4.1% unemployment rate ultimately keeps markets in the goldilocks scenario.”
After testing a post-election peak of 4.5% last month, the 10-year yield initially found buyers and so far, this week the benchmark has been rangebound, holding above a seven-week low at around 4.18%. In recent sessions, the bond market has been adding new long positions in the front end and further out the curve via futures. Treasury options activity has included trades looking for a 30-basis-point rally in 10-year yields.
“There is a better balance of risk in the rates market in terms of the Fed outlook,” said Jon Duensing, head of US fixed income at Amundi.
The jobs report will be followed next week by an important inflation report. “Payrolls and inflation will probably allow the Fed to message the policy path for 2025,” Duensing said.
Fed officials including Chair Jerome Powell acknowledged this week that a rebound in economic data since September, paves the way for them to adopt a measured approach to lowering rates from restrictive territory toward a neutral zone of around 3%, so long as inflation cools. The Fed enters its usual communications blackout this weekend ahead of this month’s meeting.
“I think they’re leaning toward delivering that rate cut,” JPMorgan Asset Management fixed income portfolio manager Kelsey Berro said Thursday on Bloomberg Television. “And I think most of the guidance you’re getting is more about 2025 and more about the need to slow down the pace of rate cuts next year.”
DWS mainly favors the two-year as the firm expects the Fed continues cutting rates next year and unlike longer-dated Treasuries, the front end has “less of that fiscal variability” around the proposed policies of President-elect Donald Trump, said Catrambone.
Mizuho Bank’s Ken Cheung is among those in Asia who will be parsing the payrolls numbers and strategizing how the data could impact global bonds.
“The payrolls will play an important role in determining the next moves for Treasuries and global rates markets, especially after such a volatile week,” said the strategist in Hong Kong. “Front-end Treasury yields will be in focus especially if the data surprises, setting the stage for potentially more market swings ahead.”
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