Invest1 publisher2 min readPublished
September's 29,000 jobs push the market's next Fed hike out to December
US payrolls grew by 29,000 in September against a 90,000 forecast, cutting market odds of an October Fed hike to 15% from about 25%. A December hike is still fully priced, so traders moved the date of the next rise and kept the rise itself.
The Investor · Invest desk
What happened
- August payrolls were revised down to a 133,000 gain in the same Labor Department report.
- Ten-year Treasury yields fell 6 basis points to 5.1717%, a day after reaching a 24-year high of 5.3445%.
- Two top Fed policymakers said this week that they wanted more data before deciding what to do with interest rates.
- Nasdaq futures rose 1.2% and S&P 500 futures rose 0.8% after the jobs data came out.
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Why it matters
- exposure Holders of short-dated Treasuries now have their near-term rate risk sitting on December, where a hike is already priced, so any further gains need data weak enough to take that hike out.
- constraint With two senior policymakers waiting for more data, each release before this month's meeting feeds into the October decision, so the odds can still move either way before then.
- decision If inflation needs genuinely restrictive rates, as Brown asks, the duration call depends on where the Fed stops after December, and one weak payrolls print does little to answer that.
The two-year yield fell only half a basis point more than the 10-year [6], on a report that missed the forecast by 61,000 jobs [1] and took 10 points off the October probability [2]. If traders thought the Fed's path had changed, the maturity most sensitive to policy expectations would have fallen well ahead of the long end [12]. The curve moved almost in parallel and still has about 45 basis points between the two [5].
The oil move makes even that gap hard to read. West Texas Intermediate fell 3.7% to $89.43 a barrel and Brent fell 2.7% to $99.45 on the same day [14]. Energy prices pushed up by the US-Israeli war with Iran have driven the selloff in global bonds in recent weeks [15]. Some of Friday's fall in long yields probably came from crude. The 10-year's 6-basis-point drop covers about a third of the 17 basis points between its Friday level and the high set the day before [3][4].
The October bet that faded was on a second rate rise [5], and December is still in the price [7]. George Brown, senior economist at Schroders, said the figures may ease concerns that the Fed's earlier cuts could stoke inflation but do not alter the inflation backdrop [8]. "The Fed looks likely to unwind last year's cuts," Brown said [9]. "The bigger question is whether rates ultimately need to be taken into genuinely restrictive territory to bring inflation back under control." [10]
Weaker data from here could start to erode December, and the two-year would then fall faster than the long end, something it did not do on Friday. A rebound in oil could rebuild the October odds before the meeting. A December hike would move the market on to Brown's question, and the 10-year would be the maturity exposed to a return toward its 24-year high.
I think the evidence favours the timing reading, because December held through a 61,000-job miss [1][7]. The counter-case is in the revision. September and a downwardly revised August average 81,000 jobs a month [7], below the 90,000 forecast for September alone [3]. If December falls below fully priced after the next payrolls report, Friday changed the destination as well as the date.
What to watch
- Comments from the two policymakers who said they wanted more data, before this month's Fed decision.
- Revisions to August's 133,000 and September's 29,000 in the next payrolls report.
- Whether Brent stays below $100 a barrel after Friday's 2.7% fall to $99.45.