Friday’s payroll data could shake up a Treasury market that has already been reeling lately. Expectations are for another strong report, but nowhere near the 304,000 jobs added in January. Treasury prices are trending lower ahead of the report — a sign, perhaps, that some expect another upside surprise in the headline number.
A Step Back: Interest Rates & Global Trade
Jobs numbers are far from the only pressure on 10-Year Treasury Notes right now, though.
Another to keep an eye on is interest rates. The Federal Open Market Committee (FOMC) set out on a two-year interest-rate-raising campaign beginning in 2016; that lasted through the end of 2018.
The Fed’s main concern is simmering inflationary pressures. Its plan has been to normalize rates after eight years of keeping them unusually low in the wake of the financial crisis. Trump and other critics argue that recent data on inflation do not justify rate hikes and that the Federal Reserve’s aggressive stance is a risk to economic growth.
In 2019, the Federal Reserve has softened that stance. At its most recent meeting, officials stated that they are now taking a “patient” approach with respect to interest rates. Minutes from the January meeting, released on February 20, show that the Fed wants to "allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge."
On the international trade front, hopes for a deal seem to have taken some of the wind out of the sails of Treasuries, and the 10-Year is down nearly one full point since the release of the FOMC minutes a couple of weeks ago. The selling has intensified in recent days, as is shown on the 1-hour chart below (10-Year June Futures), pushing yields higher into the jobs report Friday.
10-Year Treasury Notes ($ZNM9) on TSTrader
Next Catalyst: U.S. Jobs Report
The Federal Reserve doesn’t control Treasury yields directly, of course, but strong economic data tends to change rate expectations and affect all maturities (the entire yield curve). Other factors can weigh on Treasuries during periods of strengthening economic growth, (e.g., diminishing demand for “safe haven” investments like government bonds and allocation shifts to other assets such as stocks).
So while trade talks continue, the next catalyst for Treasuries will probably be Friday’s jobs report because it will give the Fed a lot of information about the state of the global economy. While another strong report is expected, the devil is in the details:
- Headline number: The US economy added 304,000 jobs in January. Economists expect Friday’s report to show a more modest increase of 175,000.
- Unemployment rate: The unemployment rate saw a slight uptick to 4% for January, but is expected to fall back to its multi-year lows of 3.9% for February.
- Average hourly wages: The Fed will be watching for signs of wage inflation. The prior report showed a modest 0.1% uptick, and Friday’s report will likely show an increase of around 0.3%.
- Revisions: Will past numbers be revised? The 304,000 headline for January surprised economists by a wide margin and will be worth noting for any revisions (December numbers were revised from 312,000 to 222,000 last month).
The last jobs report on February 1st triggered a sharp sell-off in Treasuries, including an 18-tick drop in the 10-Year ($560 on a one-lot). The bulk of the losses were recovered over the next 10 days, however, and after ticking higher through late February, Treasuries have been under fire again over the past week.
Looking forward, after the dust settles on the typical knee-jerk (aka algo-driven) reaction to the headline number, the market will digest the other details (including any revisions) and the big picture will dictate whether the 10-Year can recoup recent losses — or if the recent selling intensifies into another Treasury train wreck.