Bond yields in the U.S. declined as a significant downward revision in payroll data reinforced expectations that the Federal Reserve will cut interest rates in September. Treasuries rallied across the yield curve, with shorter maturities leading the gains. Swap traders are now pricing in approximately 100 basis points of easing for 2024. The current implied rates suggest a strong expectation for a quarter-point rate cut next month, with a roughly 20% probability of a half-point reduction.
Typically, annual revisions to U.S. job growth don’t significantly move markets, but the timing of this adjustment is crucial. Concerns have been growing that the labor market is cooling faster than anticipated amid the Fed’s sustained rate hikes.
The latest data indicates that job growth was likely less robust than previously reported. Payroll figures for the year through March may be revised down by 818,000 jobs—an average of 68,000 fewer jobs per month. This revision marks the largest downward adjustment since 2009.
Neil Dutta of Renaissance Macro Research noted, “These revisions highlight the folly of allowing the next jobs number to dictate whether the Fed should go for a 25 or 50 basis point cut in September. The revised data suggests that future job numbers are likely overstated.”
Jamie Cox of Harris Financial Group added that “for those anticipating a rate cut in September, this data essentially locks in that expectation.”
As traders look forward to Federal Reserve Chair Jerome Powell’s upcoming speech at Jackson Hole on Friday, they are also closely examining the minutes from the latest Fed policy meeting, which are expected to provide further insights into the trajectory of interest rates and the timeline for ending quantitative tightening.
The 10-year Treasury yield fell three basis points to 3.78%. Meanwhile, the S&P 500 hovered near 5,600, with Target Corp. seeing a 12% gain after reporting an end to its sales slump in the second quarter, buoyed by improved discretionary spending. On the flip side, Macy’s Inc. slightly missed its revenue estimates and lowered its sales outlook for the rest of the year.
Krishna Guha at Evercore commented that the payroll revisions would likely bolster the Fed’s view that the labor market is weakening under current policy conditions, necessitating timely rate cuts to avoid further economic slowdown.
The consensus view remains that a series of 25 basis-point cuts is the most probable outcome. “This is likely the takeaway from Powell’s speech at Jackson Hole on Friday,” Guha added. “However, the minutes from the July meeting may appear outdated, given all that has transpired since.”
Don Rissmiller at Strategas pointed out that the case for lower rates is growing stronger. The Fed will likely need to validate this rate-cut cycle, which could imply multiple rate cuts, particularly as Powell outlines his views at Jackson Hole.
Jennifer McKeown at Capital Economics suggested that central bankers might avoid giving explicit forward guidance at the Jackson Hole symposium, preferring instead to emphasize their commitment to data-driven decisions. “With most economies still expanding, inflation trending down, and financial markets stabilizing after recent recession scares, there’s less urgency for them to guide markets aggressively,” she observed. “But the risk remains that they may keep rates too high for too long.”
Despite the potential for lower rates, the economic environment remains supportive for equities, according to Solita Marcelli at UBS Global Wealth Management. She reaffirmed UBS’s S&P 500 year-end and mid-2025 targets at 5,900 and 6,200, respectively, noting that “quality growth stocks are well-positioned to outperform.”
Mark Hackett of Nationwide echoed this sentiment, stating, “The market volatility we’ve seen in the past month has settled. With macroeconomic fears receding and expectations reset, investors have seized the recent weakness as an opportunity to increase their risk exposure.” He also highlighted that upcoming Fed data and Jackson Hole speeches will likely keep the markets in a holding pattern until Friday.
Analysis and Market Impact
The downward revision in U.S. payroll data serves as a critical turning point in shaping market expectations for Federal Reserve policy. Investors are increasingly confident that the Fed will initiate rate cuts as early as September, which could set the stage for a series of reductions in the months ahead. This anticipated easing could alleviate some pressure on equity markets, particularly growth stocks, which have already started to recover as macroeconomic concerns diminish.
For bond investors, the drop in yields presents an opportunity to reassess portfolio allocations, particularly as shorter-term Treasuries seem poised to benefit most from the Fed’s dovish pivot. However, caution remains warranted as the broader economic landscape continues to evolve, with further data releases likely to influence the Fed’s course of action.
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