(Bloomberg) — Traders scaled back bets on the pace of future Federal Reserve interest rate cuts after September’s U.S. jobs report beat expectations and suggested solid employment trends.
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The strong jobs report has traders dashing aggressive bets for a deep rate cut at the next policy meeting. Ahead of the data release, bond markets were once again trading ahead of the Fed’s view on the trajectory of rate cuts this year.
It’s a pattern I’ve seen before. The rally in U.S. Treasuries was reversed in the first few months of this year as inflation and economic growth data showed unexpected upside.
“The bond market is gravitating toward the Fed’s dot plot,” said Kevin Flanagan, head of fixed income strategy at WisdomTree, as traders are once again forced to adjust their bets amid data showing economic resilience. He added that
The possibility of a 0.5 point interest rate cut in November is factored in, with the contract expecting an easing of 24 basis points. The swap contract, which is tied to the outcome of the upcoming Fed meeting, priced in just 53 basis points of interest rate cuts in November and December combined, down more than 10 basis points after the jobs report. Traders are aligning their bets on interest rate cuts with what Fed officials signaled last month through their latest forecasts.
“Similar to the rally at the end of last year, Treasury yields need to be validated by weaker data and it would not be surprising to see the 10-year yield move above 4% towards 4.15%,” Flanagan said. said. “The front end could stay below 4% as the Fed could continue easing in line with expectations.”
U.S. Treasury yields approached late New York trading highs, with the policy-sensitive two-year Treasury yield rising nearly 23 basis points to 3.93%, its biggest rise since April 10. Meanwhile, 10-year bonds rose nearly 14 basis points. Up to 3.98%.
U.S. Treasury yields have risen sharply from their closing levels at the end of August and are now well above September’s lows. Meanwhile, the popular yield curve steepener trade, which gained considerable momentum as traders priced in more aggressive Fed easing, has come under increasing pressure this week.
The 2-year yield remains about 5 basis points above the 10-year yield, with this curvilinear measure retreating from its recent peak of 23.5 basis points.
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George Catrambone, head of fixed income at DWS Americas, said: “Everyone through positioning data was holding steepers, two-year notes, five-year notes outright, so it was clear that there was a sell-off in the government bond market. There is more room.” “Until the next data point, there will be more front-end unwinding and a flattening of the curve.”
Following US bonds, European government bonds also fell sharply. German two-year bonds erased this week’s gains, with yields rising 13 basis points to 2.21%.
Traders have ended bets that the European Central Bank and Bank of England will cut interest rates. However, the overall outlook remains unchanged, with the market pricing in a 5-6 quarter point decline through next year.
After easing policy by 50 basis points last month to a range of 4.5% to 5%, Fed officials will only ease policy by another 0.5 percentage points through December, keeping inflation on course toward its long-term goal of 2%. Fed officials said they would continue easing. More attention could be paid to the risks posed to the labor market.
“The question is whether the Fed will still cut rates,” said Priya Misra, portfolio manager at JPMorgan Asset Management. “The 5% funds rate remains restrictive and the economy is slowing.”
Misra said he expects the Fed to ease by 25 basis points next month, although markets still need to keep a close eye on price pressures. Next week’s key data release will be the consumer price index for September, with inflation still above the Fed’s long-term target of 2%.
“Now that the labor market looks strong, especially in the services sector, we need to pivot to inflation,” Catrambone said. “If the CPI index rises, there is room for interest rates to rise, and if the numbers show that inflation is moderating, there is room for interest rates to stabilize.”
Economists at Bank of America and JPMorgan Chase & Co. reduced their call for a half-point cut to a quarter-point after November’s jobs report.
Bloomberg strategist says…
“Not only are we seeing a sharp rise in yields across the curve, but we are also seeing a rise in the prospect of a ‘no-landing’ scenario, with Treasuries predicated on Fed rate cuts aimed at making policy less restrictive by lowering real rates.” The price floor has also disappeared.
— Edward Harrison, macro strategist. Learn more about MLIV.
The September jobs report showed wage growth accelerated to an annualized pace of 4%, the fastest pace since May. This comes at a time when crude oil prices have soared this week amid escalating tensions in the Middle East, and industrial metal prices are also rising due to the rise in crude oil prices. China announces new economic stimulus package.
Mohamed El-Erian, president of Queen’s College, Cambridge and Bloomberg Opinion columnist, told Bumberg TV on Friday that after September’s surprisingly strong jobs report reminded us that: , said the Fed would need to refocus its efforts on combating rising prices. Inflation is not dead. ”
Mr. Misra of JPMorgan Asset Management expressed a similar opinion. “If inflation risks increase, it puts the whole easing cycle into question,” he said.
Meanwhile, Chicago Fed President Austan Goolsby said Friday that the Fed doesn’t want to react too much to “one month’s worth” of jobs data and warned of inflation risks.
U.S. employers created 254,000 jobs in September instead of the expected 150,000, according to numbers released Friday. The unemployment rate fell to 4.1%, and employment increased by a net 72,000 people in the past two months.
“Overall, this is a very strong report,” said Gregory Faranello, head of U.S. rates trading and strategy at Ameribet Securities. “This week, the US interest rate market has been trending towards higher yields on the back of a strong economy, which has taken hold, and the employment report has added to the trend.”
Mr. Faranello expects the Fed to “continue to cut rates, but the debate over the path forward will continue to increase after today’s announcement.”
(Update prices throughout.)
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