Bond yields rose slightly on Friday ahead of the official U.S. jobs data.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y,
4.475% added 1.2 basis points to 4.479%. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury TMUBMUSD10Y,
3.725% rose 1.2 basis points to 3.731%. - The yield on the 30-year Treasury TMUBMUSD30Y,
3.782% was barely changed at 3.790%.
What’s driving markets
Investors were waiting for the U.S. nonfarm payrolls report to provide more clues to the future trajectory of Federal Reserve rate hikes. As it battles with high inflation the Fed wishes to see signs of a cooling jobs market before it considers easing monetary policy.
Economists expect a net 200,000 positions were created in December, down from 263,000 the month before. The unemployment rate is forecast to stay at 3.7% and average hourly earnings are expected to have grown 0.4%, down from 0.6%.
Markets are pricing in a 55.1% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool.
The chance of a 50 basis point increase, which a few weeks ago was priced at less than 30%, is now 44.9%, a move up that reflects some persistently hawkish rhetoric from Fed officials of late.
Minutes of the Fed’s December policy meeting, released on Wednesday, showed all participants dismissing the idea that the central bank might start cutting borrowing costs later in the year. And the Fed’s hawkish stance was this week also backed by the International Monetary Fund.
The central bank is expected to take its Fed funds rate target to 5.04% by June 2023, according to 30-day Fed Funds futures.
Other U.S. economic updates set for release on Friday include the ISM services index for December and factory orders for November, due at 10 a.m. Fed speakers throughout the day include Atlanta Fed President Raphael Bostic at 11:15 a.m.; Fed Gov Lisa Cook at the same time; Richmond Fed President Tom Barkin at 12:15 p.m.; and Kansas City Fed President Esther George at 1 p.m.
There was better news on price pressures from Europe, where data showed eurozone inflation falling to a four-month low of 9.2% as energy prices cooled. German 10-year bund yields TMBMKDE-10Y,
What are analysts saying
“Recent data…shows that U.S. private companies added more jobs than expected in December. That gives the Federal Reserve more room to continue hiking interest rates, and another strong reading from the upcoming jobs report will likely send further jitters through the market,” said Sophie Lund-Yates, analyst at Hargreaves Lansdown.
“For now, the Federal Reserve seems intent on continuing to hike rates, but the market appears to be expecting one, if not two, cuts in the later part of this year. Any data that suggests inflation is going to be tougher to bring down has the ability to send fresh shockwaves…because of the apparent disconnect between current economic policy and market expectations,” she added.
