US TSYS: Short End Leads Post-NFP Rally Despite Faded 50bp Sept Cut Prospects
The short-end led a Treasury rally in a busy Friday session, despite a fading of the initial dovish reaction to soft nonfarm payrolls data.
- The week's main event August employment report showed both a miss in nonfarm payrolls growth (142k vs 165k cons) and heavy downward revisions to the prior 2 months (-86k), alongside a slight downtick in the unemployment rate.
- That spurred a sharp bull steepening in the curve as a 50bp September Fed cut regained 50% implied probability.
- Comments 15 minutes after the NFP release by NY Fed Pres Williams were seen as noncommittal on 25 vs 50bp, and yields reversed steadily from session lows to session highs.
- Gov Waller's speech at 1100ET saw a renewed Treasury bid, as headlines emerged that he could support a "front-loaded" cutting cycle - but it soon became clear that this was a hypothetical and, like Williams, didn't seem particularly pro-50bp for Sept.
- The net impact was that September pricing was trimmed to 32bp of cuts, (4-5bps fewer than seen pre-payrolls), but short-end Treasuries still ended much stronger as futures saw more cuts overall: 2.5bp extra by end-2024 (to 113bp cumulative) and 12bp of extra cuts due by Jun’25 (221bp).
- 2s10s closed the week comfortably in positive territory for the first time since 2022, rallying 7bp on the day.
- We won’t get any more Fed communications due to the pre-FOMC blackout – but for observers clinging on to the possibility of a 50bp September hike, next Wednesday’s CPI release could be eyed as a tiebreaker.
- Latest levels: The Dec 24 T-Note future is up 6.5/32 at 114-30.5, having traded in a range of 114-10 to 115-13.The 2-Yr yield is down 8.7bps at 3.6565%, 5-Yr is down 4.3bps at 3.4938%, 10-Yr is down 1.5bps at 3.7117%, and 30-Yr is unchanged at 4.0198%.
NEWS
US DATA (MNI): The U.S. unemployment rate dipped to 4.2% from 4.3% as expected in August, and job growth remained decent, the Bureau of Labor Statistics said Friday, likely sealing the deal for a quarter-point interest rate by the Federal Reserve later this month. Employers added 142,000 workers, slightly below expectations for 165,000, while payroll gains for the past two months were revised down 86,000. Traders were still not fully convinced the FOMC would be more aggressive -- the chances of a half point move inched up to just over 50% after the report.
FED (MNI): Federal Reserve Bank of New York President John Williams said Friday it is now appropriate to start lowering interest rates to a more neutral setting over time, now that inflation is moving to the central bank's 2% target and the labor market is now roughly in balance. "With the economy now in equipoise and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate," Williams said in prepared remarks.
FED (MNI): The time has come for the Federal Reserve to begin cutting interest rates, and the pace of reductions will be determined by the amount of deterioration in the economy and employment, Fed Governor Chris Waller said Thursday. “I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting,” Waller said in prepared remarks. “I believe there is sufficient room to cut the policy rate and still remain somewhat restrictive to ensure inflation continues on the path to our 2%. Determining the appropriate pace at which to reduce policy restrictiveness will be challenging.”
BOC (MNI): Canada's central bank will keep cutting borrowing costs into the first half of next year as Governor Tiff Macklem shifts his concern to a potential undershoot of the inflation target, and the speed of reductions toward a more neutral policy will hinge on the extent of further disinflation, former adviser Steve Ambler told MNI.
UK (MNI): Equalising capital gains and income tax rates would fill around half of the fiscal UK government’s fiscal “black hole' while reducing misallocation of capital and labour, the director of the Centre for the Analysis of Taxation at Warwick University told MNI.
GERMANY (MNI): Germany needs to direct more of its savings towards riskier and high-tech investment if it is to overcome economic stagnation, a leading government adviser told MNI, adding that relaxing the country’s debt brake may only lead to higher social spending.
OVERNIGHT DATA
MNI: US AUG NONFARM PAYROLLS +142K; PRIVATE +118K, GOVT +24K
- US PRIOR MONTHS PAYROLLS REVISED: JUL +89K; JUN +118K
- US AUG UNEMPLOYMENT RATE 4.2%
- US AUG AVERAGE HOURLY EARNINGS +0.4% Vs JUL +0.2%; +3.8% YOY
- US AUG AVERAGE WEEKLY HOURS 34.3 HRS
US DATA: Sizeable Downward Revisions, Concentrated In June
- Nonfarm payrolls missed with 142k (cons 165k) and saw heavy downward revisions of -86k.
- The latter were mostly concentrated in June (-61k) but the -25k for July did mean it was even weaker than first thought at just 89k.
- Nonfarm three-month average of 116k, six-month average of 164k.
- Private payrolls saw the same sized miss with 118k (cons 140k) whilst a two-month revision of -62k (somewhat more loaded to June at -39k vs -23k in July).
- Private three-month average of 96k, six-month average of 139k.
US DATA: Unemployment Rate Importantly Doesn’t See Further Increase [1/2]
- Within the household survey, the unemployment rate was essentially unchanged at 4.22% in Aug (cons 4.2) after 4.25% in July.
- It confirms the prior push further above the 4.0% the median FOMC participant had forecast in June for 4Q24 for a level already at the 4.2% forecast for both 4Q25 and the longer run.
- However, it of course doesn’t flag any further deterioration, and it also avoids another step closer to what had looked like an outside possibility of reaching the forecasts of the most dovish FOMC members (4.4% in 2024, 4.3% in 2025-26 and 4.5% in the longer run).
US DATA: But Some Signs Of Continued Pressures For Discretionary Segments [2/2]
- Details: Employment increased 168k on the month after a sluggish 67k in July, whilst labor force growth cooled to 120k after a very strong 420k in July.
- Recall that last month’s 352k increase in unemployment was heavily driven by a 249k increase in temporary layoffs. Temporary layoffs fell by 190k in August, reasonable payback after the surprisingly strong increase, but that was only enough to see overall unemployment fall by 48k so there is some broader weakness elsewhere.
- Some of the more dovish aspects of the report include a second large increase in those working part-time for economic reasons (264k after 346k), notable for a volatile series that tends to swing month-to-month. This was a big driver in the underemployment rate rising another tenth to 7.9% after a 0.4pp increase in July.
- Some more potentially discretionary areas of hiring are also increasingly under pressure: the teenage unemployment rate jumped 1.7pts to 14.1% for new cycle highs whilst the unemployment rate gap between those less than a high school diploma vs those with a Bachelors or higher extended last month’s strong increase to 4.6pps.
MNI: CANADA AUG JOBS +22.1K VS FORECAST +29K, PRIOR -2.8K
- CANADA AUG JOBLESS RATE +6.6% AS EXPECTED, PRIOR +6.4%
- CANADA UNEMPLOYMENT HIGHEST SINCE 2017 EXCLUDING PANDEMIC
CANADA DATA: Canada Unemployment Rate 6.6%, Highest Since May 2017 Ex Pandemic
- Canada unemployment rose +6.6% MOM, the highest since May 2017 excluding pandemic. That is in line with forecasts and was up from +6.4% seen in both June and July.
- Jobs +22.1K in August vs +29K expected, driven by educational services and healthcare.
- Labour force +82.5K MOM as population +96.4K.
- Average hourly wages among employees +5% YOY in August from +5.2% in July.
- Hours worked -0.1% MOM and +1.4% YOY.
- Compared to a year ago, employment in August +317K lagging behind the increase in labour force at 589K.
- The Bank of Canada sees risk of economy lagging its forecast in H2 amid growing signs of labor market weakness. BOC has said it is reasonable to expect further cuts in interest rates if inflation continues to ease broadly.
MARKETS SNAPSHOT
- Below gives key levels of markets in Friday afternoon NY trade:
- DJIA down 381.38 points (-0.94%) at 40366.5
- S&P E-Mini Future down 89 points (-1.61%) at 5422.25
- Nasdaq down 398.4 points (-2.3%) at 16728.13
- US 10-Yr yield is down 1 bps at 3.7174%
- US Dec 10-Yr futures (TY) are up 5/32 at 114-29
- EURUSD down 0.0023 (-0.21%) at 1.1088
- USDJPY down 1 (-0.7%) at 142.45
- WTI Crude Oil (front-month) down $1.06 (-1.53%) at $68.11
- Gold is down $21.84 (-0.87%) at $2494.41 - Prior European bourses closing levels:
- EuroStoxx 50 down 77.09 points (-1.6%) at 4738.06
- FTSE 100 down 60.24 points (-0.73%) at 8181.47
- German DAX down 274.6 points (-1.48%) at 18301.9
- French CAC 40 down 79.66 points (-1.07%) at 7352.3
US TREASURY FUTURES CLOSE
- Curve update:
* 3M10Y +0.815, -133.876 (L: -139.305 / H: -127.746)
* 1Y10Y +8.315, -39.401 (L: -51.002 / H: -38.136)
* 2Y10Y +6.92, 5.055 (L: -6.397 / H: 6.349)
* 2Y30Y +8.396, 35.822 (L: 19.645 / H: 37.975)
* 5Y30Y +4.326, 52.44 (L: 39.718 / H: 54.067)
Current futures levels:
* Dec 2-Yr futures (TU) up 5.625/32 at 104-9.125 (L: 103-29.3 / H: 104-13.5)
* Dec 5-Yr futures (FV) up 6/32 at 110-11 (L: 109-25 / H: 110-20.7)
* Dec 10-Yr futures (TY) up 5.5/32 at 114-29.5 (L: 114-10 / H: 115-13)
* Dec 30-Yr futures (US) up 4/32 at 125-25 (L: 125-5 / H: 126-26)
* Dec Ultra futures (WN) down 1/32 at 135-20 (L: 135-5 / H: 137-8)
US 10YR FUTURE TECHS: (Z4) Approaching The Bull Trigger
- RES 4: 116-16 High May 11 2023
- RES 3: 116-00 Round number resistance
- RES 2: 115-19 High Aug 5 and the bull trigger
- RES 1: 115-00+ Intraday high
- PRICE: 114-30+ @ 11:09 BST Sep 06
- SUP 1: 113-28/12 20-day EMA / Low Sep 3
- SUP 2: 113-00 Low Aug 8
- SUP 3: 112-25 50-day EMA
- SUP 4: 111-28+ High Jul 17
A bullish theme in Treasuries remains intact and the contract is trading higher today as it extends this week’s recovery. The bounce Tuesday, from below the 20-day EMA, highlights the end of the recent corrective phase. A continuation higher would pave the way for a test of key resistance and the bull trigger at 115-19, the Aug 5 high. On the downside, a deeper retracement would instead expose 112.25, the 50-day EMA.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US: SOFR FIX - 06/09/24 - Source BBG/CME
- 1M 5.10984 -0.00816
- 3M 4.93864 -0.00743
- 6M 4.59199 -0.02342
- 12M 4.05361 -0.05677
REPO REFERENCE RATES (rate, change from prev. day, volume):
- Secured Overnight Financing Rate (SOFR): 5.35%, no change, $2205B
- Broad General Collateral Rate (BGCR): 5.32%, -0.01%, $803B
- Tri-Party General Collateral Rate (TGCR): 5.32%, -0.01%, $773B
FED: RRP Usage Holds Prior Decline To Recent Lows
- O/N RRP usage increased just $8bn to $299bn today after yesterday’s new three plus year low of $291bn.
- The number of counterparties fell further to 57, the lowest since Aug 7.
EGBs-GILTS CASH CLOSE: Bull Steeper To Close A Strong Week
European core bonds strengthened for the 4th consecutive session Friday, with a softer-than-expected US employment report driving significant intraday volatility.
- Below-consensus August US nonfarm payroll gains plus downward revisions to prior spurred a sizeable rally across global core FI, with yields dropping to session lows as the data were seen to support more aggressive Fed easing.
- However the move quickly faded as the underlying data and key Fed policymakers were seen to be equivocal on confirming an outsized 50bp cut at the FOMC's September meeting, and within 1.5 hours yields had fully reversed to session highs.
- Earlier in the session, Eurozone quarterly labour cost and GDP data came in on the soft side, while German industrial production was well below-expected.
- Bunds outperformed Gilts, with both the UK and German curves bull steepening on the day. The 2Y segment benefited not so much from near-term US rate expectations, but from a softer expected trajectory overall in 2024-26.
- Periphery EGB spreads widened in afternoon trade as equities sold off.
- Focus next week will be on the ECB decision Thursday, for which expectations are firmly for a cut in the deposit rate by 25bps to 3.50%. We also get UK labour market and economic activity readings.
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is down 6.6bps at 2.23%, 5-Yr is down 4.9bps at 2.046%, 10-Yr is down 3.6bps at 2.172%, and 30-Yr is down 2bps at 2.436%.
- UK: The 2-Yr yield is down 5.2bps at 3.954%, 5-Yr is down 3.5bps at 3.773%, 10-Yr is down 2.9bps at 3.886%, and 30-Yr is down 1.2bps at 4.431%.
- Italian BTP spread up 2bps at 145.2bps / Spanish up 1.3bps at 82.5bps
FOREX: USDJPY Pressure Maintained, Key Support Looms
- A slightly softer-than-expected non-farm payrolls release and was offset by firmer average hour earnings figures on Friday. Downward revisions initially contributed to a softer greenback, however, the USD index continued to trade in a volatile manner and owing to the continued weakness for major equity benchmarks, looks set to close in moderate positive territory on the session.
- Fed speak added to the USD noise with comments from Williams and Waller adding little to the 25bp vs 50bp debate ahead of the Sep 18 FOMC decision.
- Standing out once again this week, is the Japanese Yen. USDJPY is currently down 0.80% at 142.30, owing to the pressure on equities and lower US yields. However, the pair has exhibited a 223 pip range, further evidence of the ongoing sensitivity to US data and bouts of waning global risk sentiment.
- The pair traded as low as 141.78, just 8 pips above the key support. The increasing significance of this technical area and the close proximity to the weekend means it is worth highlighting some levels further down. These include 140.82 - Low Jan 2 and 140.25 - Low Dec 28 ‘23 and a key support, levels that could come under threat early next week ahead of US CPI data.
- The dynamic of haven demand worked in favour of the greenback against the likes of AUD (-1.08%) and NZD (-0.85%), with these risk sensitive currencies the worst performers in G10. EUR and GBP have also weakened, but to a lesser degree, and developments for equities will be key in whether further downside in these majors can gather steam.
- Aside from US CPI, the ECB meeting will be in focus next week, as well as China inflation data and labour market figures in the UK.
-MNI (NEW YORK)
| Date | GMT/Local | Impact | Country | Event |
| 09/09/2024 | 2301/0001 | ** |  GB | KPMG/REC Jobs Report |
| 09/09/2024 | 2350/0850 | ** |  JP | GDP (r) |
| 09/09/2024 | 0130/0930 | *** |  CN | CPI |
| 09/09/2024 | 0130/0930 | *** | CN | Producer Price Index |
| 09/09/2024 | 1400/1000 | ** |  US | Wholesale Trade |
| 09/09/2024 | 1500/1100 | ** | US | NY Fed Survey of Consumer Expectations |
| 09/09/2024 | 1530/1130 | * | US | US Treasury Auction Result for 13 Week Bill |
| 09/09/2024 | 1530/1130 | * | US | US Treasury Auction Result for 26 Week Bill |
| 09/09/2024 | 1900/1500 | * | US | Consumer Credit |
| 10/09/2024 | 0600/0800 | *** |  DE | HICP (f) |
| 10/09/2024 | 0600/0700 | *** | GB | Labour Market Survey |
| 10/09/2024 | 0600/0800 | *** |  NO | CPI Norway |
| 10/09/2024 | 0700/0900 | ** |  ES | Industrial Production |
| 10/09/2024 | 0800/1000 | * |  IT | Industrial Production |
| 10/09/2024 | 0900/1000 | * | GB | Index Linked Gilt Outright Auction Result |
| 10/09/2024 | 1000/0600 | ** | US | NFIB Small Business Optimism Index |
| 10/09/2024 | 1100/1200 | GB | BOE's Breeden remarks from Wharton-IMF Dialogue - Text release | |
| 10/09/2024 | - | *** | CN | Trade |
| 10/09/2024 | - | *** | CN | Money Supply |
| 10/09/2024 | - | *** | CN | New Loans |
| 10/09/2024 | - | *** | CN | Social Financing |
| 10/09/2024 | 1210/0810 |  CA | BOC Governor Macklem speech in London UK | |
| 10/09/2024 | 1255/0855 | ** | US | Redbook Retail Sales Index |
| 10/09/2024 | 1400/1000 | US | Fed Vice Chair Michael Barr | |
| 10/09/2024 | 1530/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
| 10/09/2024 | 1700/1300 | *** | US | US Note 03 Year Treasury Auction Result |
| 11/09/2024 | 0600/0700 | ** | GB | UK Monthly GDP |
| 11/09/2024 | 0600/0700 | ** | GB | Trade Balance |
| 11/09/2024 | 0600/0700 | ** | GB | Index of Services |
| 11/09/2024 | 0600/0700 | *** | GB | Index of Production |
| 11/09/2024 | 0600/0700 | ** | GB | Output in the Construction Industry |
| 11/09/2024 | 0900/1000 | ** | GB | Gilt Outright Auction Result |
| 11/09/2024 | 1100/0700 | ** | US | MBA Weekly Applications Index |
| 11/09/2024 | 1230/0830 | *** | US | CPI |
| 11/09/2024 | 1230/0830 | * | CA | Intl Investment Position |
| 11/09/2024 | 1400/1000 | * | US | Services Revenues |
| 11/09/2024 | 1400/1000 | US | MNI Connect Video Conference on ‘Fed Balance Sheet – Comparison with Other Central Banks’ | |
| 11/09/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 11/09/2024 | 1700/1300 | ** | US | US Note 10 Year Treasury Auction Result |
| 12/09/2024 | - |  EU | European Central Bank Meeting |