Treasury yields firm as traders await US jobs report

US bond yields edged higher on Friday morning ahead of the monthly jobs report that could influence the Federal Reserve’s interest rate decision in February.

What is happening
  • The 2-year Treasury yield TMUBMUSD02Y,
    4.412%
    added 1.2 basis points to 4.479%. Yes

  • The 10-year Treasury yield TMUBMUSD10Y,
    3.696%
    rose 1.2 basis points to 3.731%.

  • The 30-year Treasury yield TMUBMUSD30Y,
    3.785%
    was barely changed at 3.790%.

What drives the markets?

Investors had been waiting for December’s U.S. nonfarm payrolls report to provide more clues about the future path of Federal Reserve interest rate hikes. As it battles high inflation, the Fed wants to see signs of a slowing job market before considering easing monetary policy.

Economists expect 200,000 net jobs to have been created in December, compared to 263,000 the previous month. The jobless rate is expected to remain at 3.7% and average hourly earnings are expected to have risen 0.4% from 0.6% previously.

Markets are pricing in a 55.1% chance of the Fed raising interest rates another 25 basis points to a range of 4.50% to 4.75% after its Feb. 1 meeting, the tool says. CME FedWatch.

The probability of a 50 basis point hike, which was priced below 30% a few weeks ago, is now 44.9%, a rise that reflects persistent hawkish rhetoric from Fed officials lately. .

Minutes from the Fed’s December policy meeting, released on Wednesday, showed that all participants rejected the idea that the central bank could start cutting borrowing costs later in the year. And the Fed’s hawkish stance was also backed this week by the International Monetary Fund.

The central bank is expected to raise its federal funds rate target to 5.04% by June 2023, according to 30-day federal funds futures.

Other U.S. economic updates slated for release on Friday include the ISM services sector index for December and factory orders for November, due at 10 a.m. ET. Fed Gov Lisa Cook at the same time; Richmond Fed President Tom Barkin at 12:15 p.m.; and Kansas City Fed President Esther George at 1 p.m.

There was better news on price pressures from Europe, where data showed eurozone inflation falling to a four-month low of 9.2% as oil prices energy were getting colder. German 10-year bund yields TMBMKDE-10Y,
2.282%,
the bloc’s benchmark, fell a fraction of a basis point to 2.316%

What analysts say

“Recent data…shows that private US companies added more jobs than expected in December. This gives the Federal Reserve more leeway to keep raising interest rates, and another strong reading of the upcoming jobs report will likely send fresh concerns into the market,” said Sophie Lund-Yates, analyst at Hargreaves Lansdown.

“For now, the Federal Reserve seems determined to continue raising rates, but the market seems to be expecting one or even two cuts in the latter part of this year. Any data suggesting that inflation will be more difficult to reduce has the ability to send new shockwaves…due to the apparent disconnect between current economic policy and market expectations,” she added.

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