Source: Jin10 Data
Author: Zhu Yu

Bond traders are turning to the Labor Department's report on Friday to look for clues about the state of the economy in the usa, as their confidence in the Fed's second significant rate cut this year begins to waver.

After Federal Reserve Chairman Powell indicated that the economy is in good shape, U.S. Treasury yields fell this week, weakening expectations in the money market for a further 50 basis point rate cut in November or December. Current pricing shows a probability of only 30% for a 50 basis point rate cut next month, down from 60% a week ago.

This raises the importance of the September employment data, expected to show an increase in the number of employed people. Any signs of labor market weakness could potentially revive a recent rally in usa Treasuries and increase expectations for significant rate cuts in the future. Policymakers initiated an easing cycle last month, unexpectedly cutting rates by 50 basis points.

Jeff Given, Senior Portfolio Manager at Manulife Investment Management, stated that if the September employment data are significantly weak, "we would be more inclined towards the bond market." Nevertheless, he believes that a 25 basis point rate cut in November and December "is the most likely scenario," as "Powell hinted this week."

The two-year u.s. Treasury yield, most sensitive to changes in monetary policy, remains around 3.70%, up 20 basis points from this year's low of 3.50%. The benchmark 10-year Treasury yield is trading at around 3.83%.

This week's economic data shows that the economy remains in a stable state. Private sector employment growth and service sector index are stronger than expected, and new claims for unemployment benefits do not indicate layoffs. Powell also reiterated this week that policymakers are not in a hurry to further cut interest rates.

According to a Bloomberg survey, economists expect the September non-farm payroll report to show an increase of 150,000 jobs - surpassing any month in the past three months. The US unemployment rate is expected to remain at 4.2%. The 4.3% reading in July was the highest level so far this year.

Employment data is crucial because Federal Reserve officials have indicated that they can focus more on threats facing the labor market once inflation returns to their long-term target of 2%.

Although lower-than-expected job growth data may reignite the possibility of a 50 basis point rate cut in November, complications in analysis may arise from Boeing's strike, as well as strikes by workers on the US East Coast and in the Gulf of Mexico, and the impact of Hurricane Helen. October's employment data will be released before the Federal Reserve meeting.

"At some point, this game between the market and the Fed will come to a climax," said Jack Manley, global market strategist at JPMorgan Investment Management, in an interview with Bloomberg TV on Thursday. He stated that the expected job growth numbers for September will bring the expectations of cumulative rate cuts at the final two meetings of the year closer to 50 basis points.

Furthermore, Michael Hartnett, a strategist at Bank of America, stated that if Friday's US non-farm payrolls report falls within the expected range, risk assets may rebound. This strategist mentioned that if the data shows an addition of 0.125 million to 0.175 million jobs last month in the US, this would support the notion of a soft landing for the economy and keep bond yields in a range, thereby leading to risky trades.

Hartnett said that the bulls are 'in control,' with 'clear evidence' that China's stimulus measures are 'working' and the Fed is likely to further ease policy. The strategist added that if non-farm payrolls exceed 0.225 million, with unemployment below 4.1%, this will push the US 30-year Treasury bond yield above 4.5%. If it falls below 0.075 million and the unemployment rate rises above 4.3%, it would mean a 'recession.'

Editor/Jeffy