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Headlines
- Treasury yields decreased following data indicating a slowdown in the US labor market, raising expectations of a Federal Reserve rate cut.
- A decline in job openings, the lowest since 2021, led to a shift in bond markets, with significant changes in yield dynamics.
- The upcoming US employment data will likely determine the extent of the Federal Reserve's rate reduction.
Treasury yields experienced a significant drop after new data indicated a further slowdown in the US labor market, prompting heightened expectations of a Federal Reserve rate cut. Just days before the release of the payrolls report, job openings came in below estimates, hitting their lowest level since 2021. This data triggered an immediate reaction in the bond market, affecting financial stocks as the US two-year note's yield briefly fell below the 10-year note's for only the second time since 2022, as traders increased their bets on a substantial rate reduction this month.
“The markets may not be as anxious as they were a month ago, but they are still seeking confirmation that the economy isn't cooling off too much,” noted Chris Larkin at E*Trade from Morgan Stanley. “So far this week, that confirmation has been elusive.”
With the Federal Reserve poised to begin cutting rates in the coming weeks, the primary question now is the magnitude of the first reduction. The monthly US employment data, due Friday, will likely play a crucial role in shaping this decision.
Market participants are closely watching after last month's jobs report heightened concerns about economic growth. Jerome Powell has emphasized that the Federal Reserve is now more focused on potential risks to the labor market than on inflation. A poor report could strengthen the case for a significant rate cut.
Neil Dutta at Renaissance Macro Research commented, "Markets seem divided between 25 and 50 basis points for September. Opting for 25 bp risks repeating the uncertainty seen after the July meeting. It may hold up until new data causes a reassessment, increasing speculation that the Fed is falling behind. It's better to take decisive action when possible."
The yield on the Treasury 10-year note fell six basis points to 3.77%. Swap traders have fully priced in a quarter-point rate cut in September, with more than a 30% chance of a half-point reduction. Over 100 basis points of easing are anticipated across the remaining three meetings this year.
The S&P 500 saw a decline of 0.4%. Nvidia Corp. continued its losses. Meanwhile, Verizon Communications Inc. is reportedly in advanced talks to acquire Frontier Communications Parent Inc. Additionally, there are reports that Joe Biden is preparing to block Nippon Steel Corp.’s $14.1 billion bid to acquire United States Steel Corp.
Krishna Guha at Evercore remarked that while the latest job-openings figures were "soft," they do not indicate a rapid decline in the labor market.
