Following last week's unexpected non-farm payroll report, traders are reassessing the Federal Reserve's monetary policy outlook. On Monday, U.S. Treasury yields continued to rise, with the 10-year yield increasing by 4 basis points to 4.01% and the 2-year yield rising by 8 basis points to 4%. These movements reflect skepticism about the Fed's next actions.
The swap market no longer fully anticipates a 25 basis point rate cut by the Federal Reserve at its November meeting, with the implied rate cut by the end of the year now below 50 basis points for the first time since early August. Goldman Sachs strategists, including George Cole, noted that the strong non-farm employment report in September might accelerate the adjustment in U.S. Treasury yields.
European bonds mirrored the movements in U.S. Treasuries, with Germany's 10-year yield increasing by 4 basis points to 2.25%, reaching a one-month high, and the UK's bond yield climbing 6 basis points to 4.19%.
The sell-off in U.S. Treasuries post-employment data is just the latest twist over the past year. Bond traders have frequently adjusted their expectations of the U.S. economy and Federal Reserve policy. Last week, unexpectedly strong U.S. service sector activity also challenged assumptions about the pace of economic deterioration.
The yield curve, a critical part of such market assessments, is once again nearing inversion, with short-term U.S. Treasuries underperforming due to their sensitivity to monetary policy. Historically, longer-term bond yields have been higher, but recent Fed rate hikes disrupted this norm. The yield curve began to normalize last month, with the 2-year yield falling below the 10-year yield.
Traders are now awaiting remarks from several Federal Reserve policymakers for further clues on the interest rate path. Speeches from Minneapolis Fed President Kashkari, Atlanta Fed President Bostic, St. Louis Fed President Bullard, and Federal Reserve Governor Bowman are scheduled. Previously, Fed Chair Powell indicated that officials expect to lower rates by 25 basis points in the last two meetings of this year.
This week's U.S. inflation data will also be closely monitored. Economists expect the Consumer Price Index (CPI) to rise by 0.1% month-on-month in September, marking the smallest increase in three months.
TS Lombard's Managing Director Dario Perkins commented that the Fed is easing policy preemptively, and inflation may be controlled without triggering a recession.
