HomeFinanceBond Traders Say Rally Hinges on Jobs Data at Risk From Shutdown
Bond Traders Say Rally Hinges on Jobs Data at Risk From Shutdown
Pedestrians near the US Capitol in Washington, DC.
(Bloomberg) — The big question for bond investors in the days ahead is whether the monthly US jobs report will shake their already-wavering conviction in another Federal Reserve interest-rate cut as soon as October.
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Traders pared bets on additional Fed easing last week as officials voiced diverging views on monetary policy while some economic data was stronger than expected. There’s one major complication for financial markets, however: A potential federal-government shutdown starting Oct. 1 threatens to delay the release of key data, including Friday’s employment figures, one of the most closely scrutinized economic reports.
A softening job market prompted the Fed to lower rates this month for the first time this year, and traders see a roughly 80% chance of a cut at the central bank’s Oct. 28-29 meeting. But they may need more weak data to validate the view that the labor market is cooling, solidify expectations for more Fed easing and keep Treasuries on track for the best annual return since 2020.
The jobs report is what “you need to drive a rally from here — it’s the most crucial part of the weak-economy, dovish-Fed story,” said James Athey, a portfolio manager at Marlborough Investment Management Ltd.
“Even if we do see the data, obviously there is a pretty high bar to getting a report weak enough to push yields lower from here,” he said, adding that he’s underweight Treasuries.
Ten-year yields climbed toward 4.2% last week after dipping to a five-month low just below 4% on Sept. 17. That was when the Fed resumed easing with a quarter-point move, although Stephen Miran, the Fed’s newest policymaker, dissented in favor of a half-point reduction. The rebound in yields came partly on data showing a drop in initial jobless claims and sturdy economic growth in the second quarter.
The reports prompted traders to trim easing expectations slightly, while still leaning strongly in favor of quarter-point cuts next month and potentially in December. About a percentage point of easing is priced in for the next 12 months.
Bonds Buoyed
Traders have in mind the weakness in government employment data in recent months, which led the Fed to pivot even with inflation above its 2% target. The move helped buoy bonds. Treasuries have gained 5.1% this year through Thursday, Bloomberg index data show. That puts the market on track for its best showing since 2020.
The median forecast in a Bloomberg survey is for the government figures due on Oct. 3 to show the US added 50,000 nonfarm jobs in September, a pickup from an average increase of less than 30,000 jobs over the previous three months. Last week, Fed Chair Jerome Powell said the recent pace of job creation “appears to be running below the ‘breakeven’ rate needed to hold the unemployment rate constant.”
He reiterated that policymakers face conflicting risks of a slowing labor market and rising inflation. And officials have shown they’re divided on how to proceed.
Chicago Fed President Austan Goolsbee last week expressed concern about tariff-driven inflation and pushed back against any call for “front-loading” multiple cuts. Governor Michelle Bowman, meanwhile, said inflation is close enough to the central bank’s target to justify more cuts because the job market is weakening.
Market positioning shows a similar split. In Treasury options, there’s been a consistent buyer targeting 10-year yields to drop to 4% and below by the end of November. Meanwhile, a JPMorgan Chase & Co. client survey showed short Treasuries positions surging.
“We view current levels on 10-year Treasury yields as broadly fair, with risk balanced between downside risk from labor-market vulnerability and upside risks should the growth outlook brighten,” said Sara Devereux, global head of Vanguard’s fixed-income group. She said the firm’s active fund managers are biased to buy debt if yields rise toward the higher end of recent ranges, with a preference for 5- to 10-year notes.
The shutdown risk also raises the importance of data that would be unaffected, including the ADP private employment report Oct. 1. While ADP hasn’t always been a reliable leading indicator for the official figures, downward revisions of the government data in recent months have confirmed the weakness seen in the private report.
“ADP will carry a ton of weight,” said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investment. Resilient job data would open “a big door to a lot of questions about the path of rates and the timing of cuts next year,” he said.
What to Watch
Economic data:
Sept. 29: Pending home sales; Dallas Fed manufacturing activity
Sept. 30: FHFA house price index; S&P Cotality home prices; MNI Chicago PMI; JOLTS job openings; Conference Board consumer confidence; Dallas Fed services activity
Oct. 1: MBA mortgage applications; ADP employment; S&P Global US Manufacturing PMI (final); ISM manufacturing; construction spending; Wards total vehicle sales
Oct. 3: Nonfarm payrolls; S&P Global US Services PMI (final); ISM Services Index
Fed calendar:
Sept. 29: Governor Christopher Waller; Cleveland Fed President Beth Hammack; Atlanta Fed President Raphael Bostic; St Louis Fed President Alberto Musalem
Sept. 30: Vice Chair Philip Jefferson; Boston Fed President Susan Collins; Chicago Fed President Austan Goolsbee; Dallas Fed President Lorie Logan
Oct. 2: Logan
Oct. 3: New York Fed President John Williams; Jefferson
