(Bloomberg) — In the coming days, bond investors are keenly watching whether the upcoming monthly US jobs report will influence their already-nervous expectations for another Federal Reserve interest-rate reduction this October.
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Traders reduced their expectations for further Federal Reserve easing last week, as officials communicated differing perspectives on monetary policy and some economic indicators surpassed forecasts. A significant hurdle for the financial markets, however, looms with the possibility of a federal-government shutdown starting October 1, which could disrupt the release of essential data, including the critical employment report set for release this Friday.
The Federal Reserve recently responded to a cooling job market by decreasing interest rates for the first time in 2023. Traders currently anticipate an approximate 80% probability of a rate cut during the Fed’s upcoming meeting on October 28-29. Nevertheless, they may require additional weak data to substantiate the thesis that the labor market is softening, thereby reinforcing expectations for further reductions in rates and keeping Treasury yields heading for their most favorable annual return since 2020.
The jobs report is pivotal: “It’s the most crucial part of the weak-economy, dovish-Fed narrative,” stated James Athey, a portfolio manager at Marlborough Investment Management Ltd. Notably, he argues that even if data becomes available, “there is a pretty high bar to producing a report weak enough to push yields lower from here,” indicating his underweight position on Treasuries.
Last week, ten-year Treasury yields approached 4.2%, following a decline to a five-month low just beneath 4% on September 17, right after the Fed initiated a quarter-point rate reduction. This uptick in yields stemmed partly from statistics revealing a decrease in initial jobless claims and robust economic growth during the second quarter.
These reports led traders to marginally trim their expectations for further easing, although momentum still strongly favors quarter-point cuts next month and potentially in December. Currently, about a percentage point of easing is factored in over the next twelve months.
Traders remain mindful of recent governmental employment data weaknesses, which prompted the Fed to pivot even with inflation lingering above its 2% target. The Fed’s response has supported bond prices, with Treasuries posting a notable 5.1% increase this year through Thursday, according to Bloomberg index data. This sets the market on a trajectory for the highest performance level since 2020.
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