Bond yields rise as rally fades ahead of jobs data

What’s driving markets

Treasury yields moved off two-week lows ahead of crucial jobs and inflation data coming over the next several days that may determine the pace of Federal Reserve interest rate rises.

The September ADP employment survey is due at 8:15 a.m. on Wednesday, and this sets the scene for the September nonfarm payrolls report published at 8:30 a.m. on Friday. U.S. producer and consumer prices data are due on October the 12th and 13th.

The benchmark 10-year yield breached 4% on September 27th amid worries about sustained Federal Reserve tightening to combat rampant inflation, and as turmoil in the U.K. bond market spooked investors.

But bonds subsequently fell back sharply in recent sessions after Bank of England bond buying calmed the gilt market and data from the U.S. suggested the world’s biggest economy was cooling.

The soft JOLTS jobs report on Tuesday was the first piece of hard evidence that labor demand is softening materially, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, and this may help the Fed go easy on future rate hikes.

“Two more JOLTS reports will be released before the December FOMC [rate-setting meeting], and if they look like August’s the Fed will not be hiking by 50bp or more at the final meeting of the year,” said Shepherdson.

Brian Daingerfield, head of G10 FX strategy at NatWest Markets, concurred: “A sharp drop in job openings reported in August seemed to embolden the idea that Fed tightening was starting to reduce demand for labor, and with it could ultimately feed through to lower inflation and an eventual pivot.”

“The ‘peak Fed hawkish’ narrative is one that has seen several false starts – data will tell us if today [Tuesday] is another such move,” Daingerfield concluded.

Economists forecast that Friday’s payroll report will show a net 275,000 jobs were created in the U.S last month, down from 315,000 in August. The unemployment rate is expected to be unchanged at 3.7% and average hourly earnings growth also unchanged at 0.3%.

Markets are pricing in a 65% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4.00% after its meeting on November 2nd. The central bank is expected to take its Fed funds rate target to 4.5% by April 2023, according to the CME FedWatch tool.

Atlanta Fed President Raphael Bostic will speak on inflation at Northwestern University at 4 p.m. Eastern.

Other U.S. economic updates set for release on Wednesday include international trade balance data for August at 8:30 a.m.; the September S&P services PMI survey at 9:45 a.m.; and the September ISM services report at 10 a.m.