Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
The bond market is waiting for nonfarm payrolls
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Tomorrow's nonfarm payrolls might produce a bond rally. Yet, next week, the US Treasury will resume its coupon supply selling 2-, 10- and 30-year US Treasuries, continuing to put pressure on the long part of the yield curve. We expect ten-year yields to continue to rise towards 5% as the Federal Reserve stays higher for longer.
After this week's bonds selloff, the attention turns to tomorrow's nonfarm payrolls. According to a Bloomberg Intelligence report, 10-year Treasury yields moved twice as much during the past year for significant surprises of payroll readings than other key data releases.
With bond volatility remaining elevated, a bond rally might ensue from a surprise on the downside of nonfarm payrolls. Yet, how much can yields drop from here?
To answer this question, we have to keep in mind that other key job data will be released tomorrow. The unemployment rate is expected to drop to 3.7% from 3.8% in August, and average hourly earnings are expected to show a monthly increase of 0.3% in September compared to 0.2% the previous month. If these data meet expectations, inflation coupled with job market resiliency will continue to remain a concern and limit the drop in yields.
Moreover, selling pressure resulting from quantitative tightening, larger coupon US Treasury issuance, and the BOJ looking to "exit" yield curve control continue to put pressure on the long part of the yield curve.
While a terrible jobs report might take ten-year US Treasury yields as low as 4.35%, we exclude that they would drop below 4.05% to enter bearish territory. An upcoming correction might build a floor for yields to resume rising to 5%.
Following tomorrow's nonfarm payrolls, our focus shifts to next week's CPI numbers, FOMC minutes, and the 2-, 10- and 30-year US Treasuries auctions. As the Federal Reserve maintains its hawkish bias, we expect long-term yields to continue to rise while the front part of the yield curve will remain anchored.
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