All Eyes on the Jobs Report as Bond Markets Finally Catch a Break

Treasury bonds rallied and Fed rate hike bets retreated, but crude oil had nothing to do with it. Softening US data did. Is the economy running out of steam?

• Treasury bonds rallied across maturities for the first time in six days as Fed rate hike bets faded
• Markets now see a 74% chance the Fed holds in October, after pricing a 70% chance of a hike on Monday
• Friday’s US jobs report will test whether cooling inflation reflects a weakening economy

For the first time in six sessions, the US bond market caught a break. Prices rose and yields fell across maturities, from the 30-year bond to the 2-year note. The most spirited rally appeared at the front end of the yield curve, where Federal Reserve policy expectations weigh heaviest. The relief arrived a day before the monthly US jobs report, and crude oil offered no help.

That last detail matters. Lower oil prices have typically been the route to softer rate hike bets since the US-Iran war began, because energy costs feed inflation expectations. This time, West Texas Intermediate (WTI) crude rose, holding inside its recent range between roughly $88 and $95 per barrel. The bond market seems to be taking its cues from the US economy itself.

Rate-sensitive assets responded, if somewhat modestly. The small-cap Russell 2000, which lacks the cushion that the AI buildout gives tech stocks, rose about 0.3%. Gold tried to anchor, silver paused its selloff, and Bitcoin lifted off the bottom of its recent range. The S&P 500 finished flat, while the tech-heavy Nasdaq 100 backed away from an attempt to break higher.

Rate hike bets unwound in a matter of days

The shift in Fed funds futures this week has been striking. On Monday, traders priced roughly a 70% chance of a hike at the October meeting. Now they see a 74% chance the Fed holds. A 25-basis-point (bps) increase by December remains all but certain at 97.6%, in line with the Fed’s own projections from its latest meeting. The outlook for 2027 has softened too. Markets still price a hike by March and most of another by September, but a third hike that was almost fully priced as recently as Wednesday has dropped out. The Fed itself projects no hikes next year.

The data have given traders reason to rethink. This week’s personal consumption expenditures (PCE) report showed three-month annualized inflation slipping to the Fed’s 2% target, with that measure cooling since May and the six-month rate easing since June. The Atlanta Fed’s GDPNow model has cut its third-quarter growth estimate to 3.7%, from between 5% and 6% when tracking began. The Conference Board’s consumer confidence index sank to its weakest since 2014, and the University of Michigan’s sentiment gauge sits within a hair of the record low.

Thursday’s manufacturing PMI from the Institute for Supply Management (ISM) did little to reverse the shift. The headline index slipped to 54.5 from 54.6, a touch below the 55 expected and far more restrained than the S&P Global PMI surveys released a week earlier. The details looked healthier than the headline. New orders rose to 55 from 53.7, employment and order backlogs grew, and the prices paid gauge jumped to nearly 78 from 71. Inventories shrank as demand ate into stockpiles. The softer spots looked like strain from strong demand.

The US dollar’s gains were the exception, and they appear to be a European story. The euro fell about 0.9%, after losing more than 1% intraday, as the gap between German government bond yields and those of more indebted members like France and Italy widened sharply. France’s struggle to get its fiscal house in order seems to be at the heart of it. The British pound, Australian dollar, Canadian dollar and Japanese yen moved far less.

Is rate hike relief coming for the right reasons?

Softer rate hike bets would ordinarily be welcome news for markets. The question is why they are softening. If inflation is cooling because rising prices have already squeezed households into retreat, the relief comes at a cost. Consumer spending makes up roughly 68% of US economic output, while business investment, where the AI buildout shows up, accounts for about 14%. Even a blistering pace of AI spending may struggle to offset a genuine consumer pullback.

Friday’s jobs report is the next test. Economists expect 90,000 jobs added in September, a step down from August’s 162,000, with the unemployment rate holding at 4.1%. Forecasts firmed this week, as earlier projections called for a rise to 4.2%. Revisions to prior months have been volatile lately, so changes to the August figure may matter as much as the September headline.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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