Strong data can still be attributed to noise, but weak data can trigger panic.
Author: Jin Shi Data
Bond market traders are on high alert for the May non-farm payroll report to be released on Friday evening, as any signs of weakness in the labor market could change their expectations for the timing of Federal Reserve rate cuts.
The number of initial jobless claims unexpectedly surged to an eight-month high on Thursday, pushing U.S. Treasury yields down to near a one-month low, with traders subsequently betting that the first rate cut will come in September (instead of the previously expected October). Although the market still expects the Federal Reserve to hold steady this month, any surprises in the non-farm data could lead to significant adjustments in interest rate expectations.
Tim Duy, chief economist at SGH Macro Advisors, noted: “The Federal Reserve needs to see a significant deterioration in the labor market before it will cut rates this summer. However, the latest data only shows a moderate slowdown rather than a collapse—the May non-farm payroll report on Friday could change this assessment.”
Federal Reserve officials have emphasized that more data is needed to support a policy shift amid the dual risks of high inflation and economic slowdown. They specifically mentioned that assessing the economic impact of the Trump administration's large-scale trade policy adjustments may take months.
The latest pricing in the interest rate swap market shows: a 25% probability of a rate cut in July (with the June meeting expected to maintain the 4.25%-4.5% interest rate range), and the probability of a rate cut in September has soared to around 90%, with a cumulative rate cut of 50 basis points this year already fully priced in.
Under the shadow of the Trump tariff war, the U.S. employment data released this week has shown a split trend: May's private sector job growth (“small non-farm”) recorded the lowest increase in two years, while the number of job vacancies in April unexpectedly rose.
Economists predict that May's non-farm payrolls will increase by 125,000 (previously 177,000), with the unemployment rate holding steady at 4.2%.
Brandywine Global portfolio manager Jack McIntyre (currently long on bonds) warned: “The economy has shown signs of fatigue. If shorting bonds encounters weak data, it will be passive—strong data can still be attributed to noise, but weak data can trigger panic.”
Bond traders continue to bet on a "steepening yield curve" (where short-term bonds outperform long-term ones), based on the logic that a Federal Reserve rate cut will lower short-end yields, while Trump’s tax reform may worsen the fiscal deficit and push up long-end rates.
Kelsey Berro, fixed income manager at J.P. Morgan Asset Management, pointed out: “Further steepening of the curve requires short-term bills to rise, which depends on whether more evidence of a slowdown in the labor market emerges.”
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