Interest Rate Speculations in Reverse: Labor Market Data as the New Beacon of Hope

Uncertainty in the bond markets is increasing as traders eagerly await the soon-to-be-released labor market report for clues about the health of the US economy. The previously widespread expectations of a second significant interest rate cut by the Federal Reserve this year are beginning to diminish. This week, US Treasury bonds came under pressure as the money market scaled back its expectations for another half-percentage-point reduction in November or December. This followed statements from Federal Reserve Chairman Jerome Powell, who emphasized the robust economic conditions in the US. Currently, the probability of such a rate cut next month is estimated at only 30%, down from 60% just a week ago. The labor market data set for September is now eagerly awaited. Any signs of weakness could reinvigorate the recent rally in US Treasury bonds and foster hopes for a substantial rate cut. The policy had surprised many investors when it initiated its rate-cutting cycle last month with a 50-basis-point reduction. Jeff Given, an experienced portfolio manager at Manulife Investment Management, remains cautious, yet sees smaller quarter-percentage-point cuts as more likely in November and December. The two-year Treasury, which is particularly sensitive to changes in monetary policy, remained stable at around 3.70%, and the benchmark ten-year yield traded at approximately 3.83%. Current economic indicators suggest that the economy remains in good shape, with stronger-than-expected employment growth in the private sector and signs of a robust services sector. While Powell has emphasized that there is no rush for further rate cuts, economists expect a rise in employment by 150,000 jobs in September. The unemployment rate is expected to remain at 4.2%. The upcoming labor market data are crucial because Fed officials have stated that, given the return to the 2% inflation target, they can focus more on risks to the labor market. Weaker-than-expected figures could rekindle the scenario of a half-percent rate cut in November, but strikes at Boeing and ports, as well as the impact of Hurricane Helene, could complicate the analysis. "This game between the market and the Fed will eventually come to an end," said Jack Manley, a global market strategist at JPMorgan Investment Management, on Bloomberg TV. He noted that the expected employment figures for September would bring the outlook for cumulative rate cuts at the last two meetings of this year closer to 50 basis points.