U.S. Treasury yields fell on Friday following a surprising decline in July payrolls, which saw a reduction of 23,000 jobs, contrary to economists' forecasts of an 80,000 job gain. This unexpected data has led traders to reduce the likelihood of a Federal Reserve interest-rate hike in September.
The drop in yields was moderated as traders anticipated long-dated supply and consumer price inflation data for July, expected next week. The unemployment rate eased to 4.1%, defying expectations of a steady 4.2%, while average hourly earnings rose by 3.2% year-over-year, below the consensus of a 3.5% increase. The 2-year note yield, closely tied to Fed rate expectations, fell 4.35 basis points to 4.202%, reaching its lowest since July 17 at 4.1536%. Meanwhile, the benchmark 10-year note yield decreased by 1.44 basis points to 4.656%, and the yield curve between 2- and 10-year notes steepened to 46 basis points.
Fed funds futures traders are now pricing in a 44% chance of a rate hike at the Fed’s September meeting, down from 55% before the jobs data release. However, they still see a 77% probability of a rate increase by December. The labor market, a strong point in the U.S. economy, faces challenges amid high inflation concerns, exacerbated by rising oil prices due to the ongoing Iran conflict.
“If you look at all the data components, wages, (nonfarm payrolls), this is a very weak labor market that's all of a sudden happened.”
Tom di Galoma, managing director of global rates trading at Mischler Financial Group
The Treasury Department plans to sell $125 billion in coupon-bearing debt next week, including $58 billion in 3-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds.
"If you look at all the data components, wages, (nonfarm payrolls), this is a very weak labor market that's all of a sudden happened," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group. "It takes the Fed off the hiking table."
Background
The unexpected decline in payrolls and its impact on rate hike expectations underscore the volatility in the U.S. economic landscape. As the market awaits the upcoming consumer price inflation data, traders remain cautious about future Fed policy directions.
Looking ahead, the focus will be on the consumer price inflation data for July and the outcome of the Iran conflict, both of which could significantly influence market dynamics and Fed policy decisions.
