Tonight's non-farm payroll data will decide the fate of a September rate cut, with weak figures potentially triggering market panic
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Tonight's non-farm payroll data will decide the fate of a September rate cut, with weak figures potentially triggering market panic
Strong data can still be attributed to noise, but weak data triggers panic.
Navigating Web3 tides with focused insightsAuthor: Jinshi Data
Bond market traders are bracing for Friday evening's release of the May nonfarm payrolls report, as any signs of labor market weakness could shift their expectations on the timing of Federal Reserve rate cuts.
Initial jobless claims unexpectedly surged to an eight-month high on Thursday, sending U.S. Treasury yields down to near a one-month low. Traders quickly moved to price in a first rate cut in September instead of the previously expected October. While markets still anticipate the Fed will hold rates steady this month, any surprise in the nonfarm payrolls data could trigger a significant reassessment of rate expectations.
Tim Duy, chief economist at SGH Macro Advisors, said: "The Fed needs to see a clear deterioration in the labor market before cutting rates this summer. But recent data show only a modest slowdown, not a collapse—Friday’s May jobs report could change that assessment."
Fed officials have emphasized the need for more data to support a policy pivot amid dual risks of persistent inflation and economic slowdown. They specifically noted it may take months to assess the economic impact of the Trump administration’s sweeping trade policy changes.
The latest pricing in interest rate swaps shows: a 25% probability of a rate cut in July (with June meeting expected to keep rates at 4.25%-4.5%), nearly 90% chance of a cut by September, and 50 basis points of cumulative easing fully priced in by year-end.
Under the shadow of Trump’s tariff war, recently released U.S. employment data have shown mixed signals: May’s private-sector job growth (“the little jobs report”) marked the weakest pace in two years, while April’s job openings rose unexpectedly.
Economists forecast May nonfarm payrolls will increase by 125,000 (previous: 177,000), with the unemployment rate holding steady at 4.2%.
Jack McIntyre, portfolio manager at Brandywine Global (currently overweight bonds), warned: “The economy is showing fatigue. If you’re shorting bonds and weak data comes in, you’ll be caught off guard—strong data can still be dismissed as noise, but weak data triggers panic.”
Bond traders continue betting on a “steepening yield curve” (i.e., outperformance of short-term bonds over long-term ones), based on the view that Fed rate cuts will push down short-end yields, while Trump’s tax policies could widen fiscal deficits and lift long-end rates.
Kelsey Berro, fixed-income manager at JPMorgan Asset Management, noted: “Further curve steepening requires gains in short-dated paper, and that hinges on whether we see more evidence of labor market slowing.”
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