The global bond market experienced a significant selloff, but the US Treasury market has found a moment of respite as investors await crucial jobs data that will influence the Federal Reserve’s interest rate decisions. This follows a tumultuous period where 30-year Treasury yields reached their highest point since 2023. Trading in the bond market concluded early at 2 p.m. New York time due to a national day of mourning for former President Jimmy Carter, with US stock markets closed for the day. Conversely, the British pound slumped to a more than one-year low, and UK gilts declined amidst concerns about the Labour government’s ability to manage the deficit amid rising borrowing costs.
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Market Analysis and Upcoming Jobs Report
BMO Capital Markets strategists Ian Lyngen and Vail Hartman observed that the scale of the recent Treasury selloff justified a pause, even as the gilt market continued to decline. They anticipate that Friday’s jobs data will serve as a critical test for the market’s “hawkish Fed pricing.” While acknowledging a general expectation of strong employment figures, they believe Thursday’s Treasury market activity indicates a more balanced pre-payrolls outlook. “The resulting skew will leave the Treasury market poised to respond with a stronger bid in the event of a downside surprise than any selling pressure that might emerge on a strong report,” the BMO strategists noted.
Leading up to the jobs report, several Federal Reserve officials reiterated the likelihood of maintaining current interest rates for an extended period, with rate cuts contingent on a significant cooling of inflation. The yield on 10-year Treasuries remained relatively stable at 4.69%, and the dollar saw a slight increase. Bitcoin, after a promising start to the year surpassing $100,000, retreated to its lowest level of 2025, struggling to maintain momentum.
Economists predict a moderation in hiring by US employers in December, concluding a year of healthy job growth anticipated to continue into 2025. Consensus estimates from a Bloomberg survey project a 165,000 increase in payrolls for December, with the unemployment rate holding steady at 4.2% and a slight cooling in average hourly earnings growth.
Expert Insights on Economic Indicators
Andrew Husby of BNP Paribas Securities suggests that a significant deviation from key metrics, such as payroll growth well below 100,000 and an unemployment rate exceeding 4.3%, would be necessary to prompt a rate cut this month. Otherwise, the currently anticipated hold on rates is likely. He also anticipates a downward revision in the pace of payroll employment growth for 2023-2024 in the upcoming report, but maintains that the job market will appear resilient. TD Securities’ Oscar Munoz and Gennadiy Goldberg concur, forecasting a “moderating, but still firm increase for job gain” and a stable unemployment rate at 4.2%. They expect limited market reaction to a moderately strong labor market report.
A survey by 22V Research reveals heightened investor attention on payroll data, with 40% viewing Friday’s data as “risk-off,” indicating potential negative market implications. Dennis DeBusschere of 22V highlights the renewed focus on unemployment figures. Average hourly earnings, which have recently risen, will be a crucial indicator, as sustained wage growth could limit the Fed’s ability to further reduce rates, according to Matthew Weller of Forex.com and City Index.
Interest Rate Dynamics and Global Economic Outlook
Since mid-September, the Fed’s 100 basis point rate cut has been offset by a similar rise in 30-year Treasury bond yields. This unusual divergence, mirrored in the UK with rising 30-year yields despite the Bank of England’s easing monetary policy, reflects investor concerns about persistent inflationary pressures and ongoing government borrowing.
Yardeni Research strategists believe the recent bond yield increases were anticipated and represent a normalization, suggesting a 4% to 5% range for the 10-year yield, aligning with pre-financial crisis levels. Federal Reserve officials, including Chair Jerome Powell, are increasingly referencing “market-based” inflation, which excludes certain service sectors requiring price estimations, as a basis for confidence in their outlook. This metric paints a more stable inflation picture compared to the central bank’s preferred underlying inflation gauge.
Market Predictions and Investment Strategies
Michael Gapen of Morgan Stanley anticipates lower inflation in the first half of the year, supporting gradual rate cuts, but foresees restrictive trade policies hindering disinflation and further Fed action in the latter half. Bloomberg Intelligence’s Ira Jersey and Will Hoffman note that options on SOFR futures are pricing in one more Fed rate cut for the year, with a low probability of rates returning to September 2024 levels.
As Fed rate cut expectations diminish, the US dollar has strengthened, leading Emily Roland and Matt Miskin of John Hancock Investment Management to favor the dollar as a portfolio hedge. Bank of America Corp. advises US companies to increase their hedging against dollar strength in anticipation of further gains.
Conclusion: Market Uncertainty and the Importance of Jobs Data
The current market environment is characterized by uncertainty, with investors closely watching key economic indicators for signals regarding future Federal Reserve policy and the direction of the global economy. The upcoming jobs report holds significant weight in shaping these expectations and could trigger substantial market reactions depending on the outcome. A strong report might bolster the case for maintaining current interest rates, while a weaker report could increase pressure on the Fed to consider further rate cuts. This delicate balance underscores the importance of Friday’s jobs data in navigating the current market landscape.
