Tonight's non-farm payrolls will determine the fate of a rate cut in September, weak data may trigger market panic.

Author: Jin10

Bond traders are on high alert for the May non-farm payroll report to be released on Friday evening, as any signs of weakness in the labor market could alter their expectations for the timing of Federal Reserve interest rate cuts.

The number of initial jobless claims announced on Thursday unexpectedly surged to an eight-month high, causing U.S. Treasury yields to briefly drop to a nearly one-month low, prompting traders to bet on a potential interest rate cut in September (instead of the previously expected October). Although the market still anticipates the Federal Reserve will remain on hold this month, any unexpected developments in the non-farm payroll data could trigger significant adjustments in interest rate expectations.

SGH Macro Advisors Chief Economist Tim Duy pointed out: “The Federal Reserve needs to see a significant deterioration in the labor market before it will cut rates this summer. But the latest data only shows a moderate slowdown rather than a collapse – Friday’s May non-farm payroll report could potentially change this assessment.”

Federal Reserve officials have emphasized that more data is needed to support a policy shift amid the dual risks of high inflation and economic slowdown. They particularly mentioned that assessing the economic impact of the Trump administration’s large-scale trade policy adjustments may take several months.

The latest pricing in the interest rate swap market shows: a 25% probability of a rate cut in July (the June meeting is expected to maintain the interest rate range of 4.25%-4.5%), and the probability of a rate cut in September has soared to around 90%, with a cumulative rate cut of 50 basis points within the year already fully priced in.

Under the shadow of Trump’s tariff war, the US employment data released this week shows a divided situation: private sector job growth in May (“small non-farm”) hit the lowest growth rate in two years, while the number of job vacancies in April unexpectedly rose.

Economists predict that non-farm payroll employment will increase by 125,000 in May (previous value 177,000), and the unemployment rate will remain steady at 4.2%.

Jack McIntyre, portfolio manager at Brandywine Global (currently bullish on bonds), warns: “The economy has shown signs of fatigue. If shorting bonds is met with weak data, it will fall into a passive state - strong data can be attributed to noise, but weak data will trigger panic.”

Bond traders continue to bet on a “steepening yield curve” (i.e., short-term bonds outperforming long-term ones), with the logic being: the Federal Reserve’s interest rate cuts will lower short-end yields, while Trump’s tax reform may worsen the fiscal deficit and push up long-end rates.

Kelsey Berro, fixed income manager at J.P. Morgan Asset Management, noted: “Further steepening of the curve will require a rise in short-term bills, depending on whether there is more evidence of a slowdown in the labor market.” ”