Weak September jobs data pushes Fed rate‑hike odds lower, Treasury yields wobble

Jobs data dents expectations for an October rate hike The U.S. Labor Department reported that September non‑farm payrolls increased by just 29,000 jobs, a figure that fell short of the median forecast in a Bloomberg poll of economists. The miss, coupled with a downward revision to the prior two months, prompted bond traders to reassess the Federal Reserve’s near‑term policy stance.

Treasury market reacts with volatility In the wake of the report, yields on two‑year Treasury notes slipped as much as 10 basis points before climbing back to about 4.81% by late morning in New York. The broader market saw the benchmark 10‑year yield hover near 5.21%, its highest level since 2002, after briefly dipping three basis points earlier in the day.

Fed hike odds fall to roughly one‑in‑five Interest‑rate swaps, the market’s gauge of future policy moves, now imply a 20% probability that the Fed will raise its benchmark rate at the October meeting, down from nearly 30% before the data. For the remainder of 2024, the market briefly stopped fully pricing in a rate hike at the year‑end meeting.

Analyst commentary - **Charles Tan**, CIO of global fixed income at American Century Investments, said the data “gives the Fed more cover to stay on hold and not to hike,” while noting that “one or two inflation data points” could swing sentiment back hawkish. - **James Athey**, money manager at Marlborough Investment Management, called the report a “nail in the coffin for an October hike,” adding that the narrative of a strong U.S. economy is “nonsense.” - **Thomas Simons**, chief U.S. economist at Jefferies, echoed the view that policymakers are likely to be patient after the weaker payrolls. - **Oscar Munoz**, strategist at TD Securities, revised the Fed’s path to anticipate hikes in December and March rather than October and January.

Global ripple effects European and UK rate‑hike expectations were also trimmed. Money‑market pricing now leans toward two ECB hikes instead of three, and three Bank of England moves instead of four, after earlier pricing of over 100 basis points of tightening for both regions.

Market positioning Traders had built short positions in U.S. Treasuries ahead of the data release, a stance that may have amplified the post‑report rally. Following the payroll numbers, some investors sold November fed‑funds futures, effectively removing bets on an October rate increase.

Policy backdrop Fed officials, including Vice Chair Philip Jefferson and New York Fed President John Williams, have signaled a willingness to “wait and watch” upcoming data. Dallas Fed President Lorie Logan, however, argued that additional hikes remain necessary to curb inflation, though she acknowledged that higher Treasury yields could also temper economic activity.

Looking ahead The market now eyes the Fed’s December meeting as the next potential turning point, with inflation readings and the next employment report set to shape the central bank’s calculus.