Michael Mackenzie
4 min read
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(Bloomberg) -- Treasury yields rose after the first of this week’s three reports on US labor-market conditions failed to provide justification for a Federal Reserve interest-rate cut as soon as next month.
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Yields across maturities extended their rebound from the lowest levels in two months, led by shorter-dated tenors that are most sensitive to Fed policy shifts. The two-year note’s yield exceeded 3.78% — after having fallen below 3.70% for the first time since May 2 in anticipation that employment data to be released this week could warrant a rate cut at the next Fed meeting in late July.
JOLTS job openings data for May showed an unexpected, steep increase to the highest level since November, a sign of labor-market strength. That cut short a positive market reaction to comments by Fed Chair Jerome Powell, speaking at a global monetary policy event in Sintra, Portugal. Powell, facing growing political pressure to cut interest rates, declined to rule out a July cut.
“It seems as if the market has bypassed the data-dependency” of Powell “and focused more on the much stronger May JOLTs data,” said John Brady, managing director at RJ O’Brien.
Momentum has been building in favor of earlier Fed rate cuts despite expectations that tariffs introduced by the US administration this year will contribute to faster inflation. Economists at Goldman Sachs Group Inc. on Monday predicted Fed rate cuts in September, October and December. They previously expected one, in December.
Related story: Goldman Sachs Pulls Forward Fed Rate-Cut Forecast to September
A July rate cut is viewed as a long shot, but swap contracts linked to Fed policy shifts assign it about 15% odds versus near zero last month, and in the past week, interest-rate options trades looking for lower yields and a faster pace of Fed easing have been popular. A quarter-point cut is fully priced in for September.
Against the backdrop of record highs for US stocks and other favorable financial conditions, Fed policymakers may insist on evidence of a faltering job market before cutting rates. Two other reports this week — the ADP report on private-sector job creation and the US Labor Department’s employment report, both for June — could still provide it.
“If the jobs data finally confirm the concerns on the labor front, it gets the Fed off the fence, to at least start to signal that July is a possibility,” said George Goncalves, head of US macro strategy at MUFG Securities Americas Inc. “You’ll get more Fed speakers leaning toward a cut in July. Investors don’t want to miss that pivot. But it’s all predicated on a weak NFP,” he said, referring to the employment report’s nonfarm payrolls component.
