The Impact of Non-Farm Payroll Data on US Treasury Yields

US Treasury traders are closely watching the upcoming July non-farm payroll data, scheduled for release on Friday. Traders are aiming to gain clearer insights into whether a slowdown in hiring will open the door for the Federal Reserve to cut interest rates in September. Despite a gradual slowdown in hiring since April, the Federal Reserve maintained interest rates unchanged this week. Federal Reserve Chair Jerome Powell indicated that the labor market remains "in balance," albeit with some downside risks. This decision reflects a "wait-and-see" approach from policymakers. However, the possibility of a September rate cut still remains, especially with two additional jobs and inflation reports due before the September meeting. Powell emphasized that he has not seen "significant weakening" in the labor market, while acknowledging potential downside risks.

Labor Market Expectations and Other Data

Other labor-related data so far this week suggest the US economy remains resilient in the face of tariff and trade negotiation complexities. This has led to some tempering of market expectations for rate cuts this year. The probability of a 25-basis-point rate cut in mid-September has fallen below 40%, and traders' bets on a rate cut at the October meeting have also receded. Treasury yields have risen this month, with the two-year Treasury yield, most sensitive to monetary policy, rising by 24 basis points. This has led to the bond market recording its second negative-return month of the year. Consequently, the rationale for increasing or decreasing Treasury holdings in August depends significantly on the July jobs report. The absence of a significant decline in hiring is puzzling the bond market, which is still betting on approximately 100 basis points of rate cuts over the next year.

Non-Farm Payroll's Impact on Fed Decisions

Employment reports have become among the most influential data releases for the bond market, often triggering significant volatility. Over the past year, two-year Treasury yields have averaged 10-basis-point moves on non-farm payroll release days, double the volatility of CPI release days. The jobs data will also determine the path of Fed rate cuts. Related expectations have fluctuated since last December. However, policymakers' median forecasts remained unchanged in March and June, suggesting the federal funds rate range will drop to 3.75% to 4% by year-end, implying two 25-basis-point cuts. Expectations are that Friday's report will show 110,000 jobs added in July, down from 147,000 in June. The unemployment rate is expected to rise slightly to 4.2%, after unexpectedly falling to 4.1% in June. This figure is seen as being influenced by tightening US immigration policies, reflecting the balance between slowing demand and decreased labor supply. Beyond the latest jobs data, the bond market believes a significant cooling in inflation over the next two months is needed to persuade enough Fed officials to deliver the two rate cuts anticipated in the June dot plot. Bloomberg Macro Strategist Simon White suggests that surveys estimate this time non-farm payrolls are more likely to bring surprise, leading to an unexpected reaction in interest rates and bond market because of low volatility. Yields are currently not reacting strongly to the latest tariff news, but the situation may be different after the jobs data comes out. In short, the bond market is awaiting the July non-farm payroll data to assess the labor market's strength and its potential impact on the Federal Reserve's decisions regarding interest rate cuts. In addition, traders are closely monitoring inflation and other economic data to shape their expectations about the future path of monetary policy.