Market News

(Bloomberg) -- Bond investors are zeroing in on Thursday’s US labor market report, which is expected to either kill or rekindle waning expectations for a Federal Reserve interest-rate cut next month.

The September payrolls report, due at 8:30 a.m. New York time after a delay caused by the government shutdown, will be the only official major jobs data published before Fed policymakers meet for the final time this year.

A report showing a resilient employment situation could undercut the case for more rate cuts and dash hopes of a further rally in the $30 trillion US Treasuries market. A soft reading, on the other hand, could revive bets on a third consecutive quarter-point cut at the Dec. 10 meeting and boost a market that’s already headed for its best year since 2020.

“If it’s a weak number, the market reaction will be larger than if it’s an in-line, or slightly higher print, given where the December meeting is priced,” said Dan Carter, a senior portfolio manager at Fort Washington Investment Advisors. “The Fed isn’t going to have a lot more Tier 1 data prior to the meeting.”

Odds of a December cut assigned by the market have steadily slipped in recent weeks as some policymakers pushed back against further easing while inflation continues to run above the Fed’s 2% target.

The market assigned about a 30% probability of a reduction on Thursday. As recently as last month, investors had almost fully priced in the cut, wagering that weakness in the labor market would outweigh price pressures.

Treasuries have traded in a tight range this month, with benchmark 10-year yields hovering above 4%. They were little changed around 4.13% on Thursday, having risen two basis points on Wednesday after the Bureau of Labor Statistics announced the October jobs report wouldn’t be released due to the effects of the shutdown.

Those numbers will be rolled into the November report, which is set to come out after the Fed’s December meeting, leaving both policymakers and investors without a key piece of economic data.

Sentiment around a rate cut waned further Wednesday as minutes of the Federal Open Market Committee’s Oct. 28-29 meeting showed that “many” Fed officials said it would likely be appropriate to keep interest rates steady for the remainder of 2025.

‘Strong Signal’

Prior to the jobs report release, traders expected the bond market volatility to pick up. The ICE BofA MOVE Index, a gauge of expected bond-market volatility, has rebounded to a two-month high after recently reaching a four-year low during the government shutdown.

Economists surveyed by Bloomberg expect that payrolls increased by 51,000 in September, picking up from a pace of 22,000 in August. The unemployment rate is forecast to remain steady at 4.3% after inching higher during the previous two months.

Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, said the unemployment rate will be more important to watch as an indicator of the health of the labor market since the administration’s crackdown on immigration has reduced labor supply.

“If the unemployment is stable, it’s another piece of evidence that the Fed doesn’t need to stimulate the economy further,” said Al-Hussainy. “If the unemployment goes up, even by 1/10, it’s a strong signal that the economy needs more help.”

--With assistance from James Hirai.