Bond traders turn to jobs data as bets on big Fed cut falter

US Treasuries slipped this week and money markets reined in expectations for another half-point rate reduction in November or December, after Chair Jerome Powell said the economy is on good footing.

Bond traders are turning to Friday’s labour-market report for clues on the health of the US economy, as conviction about a second big interest-rate cut by the Federal Reserve this year begins to falter.

US Treasuries slipped this week and money markets reined in expectations for another half-point rate reduction in November or December, after Chair Jerome Powell said the economy is on good footing. Pricing now implies just a 30% chance of a 50-basis-point next month, down from 60% a week ago.

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That’s raising the stakes ahead of a reading of September employment data, which is expected to show an increase in payrolls. Any evidence of labour-market weakness stands to reinvigorate the recent rally in US Treasuries and boost expectations for another large cut ahead. Policymakers surprised many investors when they kicked off their easing cycle last month with a half-point cut.

Significant weakness in the September jobs data “would see us lean more into the bond market,” said Jeff Given, senior portfolio manager at Manulife Investment Management, which has reduced its exposure to market interest rates. Still, he sees quarter-point rate cuts in November and December as “the most likely scenario” and “what Powell indicated this week.”

The two-year Treasury yield — among the most sensitive to changes in monetary policy — was steady at around 3.70%, up 20 basis points from this year’s low of 3.50%. The benchmark 10-year yield traded around 3.83%.

Economic data this week suggest the economy remains on solid footing. Private-sector job growth and a gauge of the services sector were stronger than anticipated, and new jobless claims failed to signal layoffs. Powell this week also reiterated his comment that policymakers feel no hurry to deliver more rate cuts.

Economists expect the September jobs report, due at 8:30 a.m. in Washington, to show payrolls increased by 150 000 — more than in each of the previous three months, according to a Bloomberg survey. The US unemployment rate is seen holding at 4.2%. July’s 4.3% reading was the highest so far this year.

The jobs data are key because Fed officials have said that with inflation having moved back toward their 2% long-term target, they can be more attentive to the risks posed to the labour market.

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While a weaker-than-anticipated job growth figure could revive the odds of a half-point rate cut in November, the impacts of worker strikes at Boeing Co and the US East and Gulf ports and of Hurricane Helene could complicate the analysis. October employment data is set to be released November 1, before the Fed meets.

“At some point this game of chicken between the market and the Fed is going to come to a head,” Jack Manley, global markets strategist at JPMorgan Investment Management, told Bloomberg Television on Thursday. He said the expected job growth figure for September would shift the outlook for cumulative rate cuts over this year’s final two meetings closer to 50 basis points.

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