Author: Jin Shi Data
Bond market traders are on high alert for the May non-farm employment report to be released Friday night, with any signal of labor market weakness potentially changing their expectations for the Federal Reserve's rate cut timing.
Unexpectedly high initial jobless claims released on Thursday pushed U.S. Treasury yields to near a one-month low, with traders betting on the first rate cut in September (rather than the previously expected October). Although the market still expects the Fed to remain on hold this month, any surprise in the non-farm data could trigger a major adjustment in rate expectations.
Tim Duy, chief economist at SGH Macro Advisors, noted: "The Fed needs to see significant labor market deterioration before cutting rates this summer. However, the latest data only shows a moderate slowdown rather than a collapse—the May non-farm employment report on Friday could change this assessment."
Fed officials have emphasized the need for more data to support a policy shift under the dual risks of high inflation and economic slowdown. They particularly mentioned that assessing the economic impact of the Trump administration's large-scale trade policy adjustments might take months.
The latest interest rate swap market pricing shows: 25% probability of a rate cut in July (June meeting expected to maintain the 4.25%-4.5% rate range), rate cut probability in September surging to near 90%, with a total of 50 basis points of rate cuts for the year fully priced in.
Under the shadow of Trump's tariff war, recent U.S. employment data has shown a split: May private sector employment ("small non-farm") hit a two-year low growth rate, while April job openings unexpectedly rose.
Economists predict May non-farm employment will increase by 125,000 (previous value 177,000), with the unemployment rate remaining steady at 4.2%.
Jack McIntyre, portfolio manager at Brandywine Global (currently long on bonds), warned: "The economy shows signs of fatigue. If shorting bonds encounters weak data, it will be passive—strong data can still be attributed to noise, but weak data will trigger panic."
Bond traders continue to bet on "yield curve steepening" (short-term bonds performing better than long-term), based on the logic that Fed rate cuts will lower short-end yields, while Trump's tax reforms might worsen fiscal deficits and push up long-end rates.
Kelsey Berro, fixed income manager at JPMorgan Asset Management, pointed out: "Further yield curve steepening requires short-term notes to rise, which depends on more evidence of labor market slowdown."
