Bonds simmer as payrolls offer reality check

A look at the day ahead in the US and global markets by Mike Dolan

After a torrid start to the year for US Treasuries and global sovereign bonds in general, Friday tests the “hot economy” thesis by revealing how far US labor markets remain being tightened when a new administration takes office in Washington this month.

Friday’s release of the December US jobs report ties in a variety of labor market updates this week, with a somewhat mixed picture so far.

The weekly unemployment series released on Wednesday was notable as it indicated the lowest jobless claims in eight months. Job openings in November also increased. But private sector payroll growth missed forecasts and Thursday saw data showing both hiring and layoffs slowed last month.

With the national payrolls report potentially decisive on all of the above, consensus expectations are for job growth to have softened broadly in December to around 160,000, with the jobless rate steady at 4, 2%

If this is achieved, it is likely that the Federal Reserve will feel justified in a stance of more cautious rate cuts. Its policymakers have indicated just two more quarter-point cuts for this year, though futures markets are pricing it marginally lower: about 41 basis points as of Friday and the first 25bp not due until June.

On Thursday, the Fed’s latest speakers took a hawkish slant.

Kansas City Federal Reserve President Jeff Schmid expressed reluctance to cut interest rates again. “I think we are close to the point where the economy needs neither restrictions nor support and this policy should be neutral,” Schmid said.

Fed Governor and known hawk Michelle Bowman said she supported last month’s interest rate cut as the “final step” in recalibrating the central bank’s monetary policy.

With Thursday’s market closures for former President Jimmy Carter’s funeral putting a damper on an anxious first full trading week of the year, long-term Treasury yields remain elevated ahead of the payrolls report.

At 4.94%, the 30-year “long bond” yield is still just shy of 5% for the first time since October 2023, while benchmark 10-year yields at 4.70 % remain near this week’s eight-month highs.

Fueled in part by some extreme cold storms in the Northern Hemisphere, oil prices remain a drag and US crude hit its highest since October.

The dollar index also remains near a two-year high set last week.

With Wall Street closed Thursday, futures are slightly in the red ahead of Friday’s reopening.

Of course, the payrolls report addresses just one of the bond market’s worries, with anxiety and uncertainty about the extent of President-elect Donald Trump’s planned tax cuts, tariff hikes and immigration limitations still a wild card.

But to the extent that any or all of these policy promises are inflationary, in an already sticky inflationary environment, the jobs report sets the tone ahead of Trump’s Jan. 20 inauguration.

For equity markets, the focus on bonds may start to shift a bit as the fourth-quarter earnings season gets under way: S&P500 companies as a whole are expected to have reported 10% profit growth l ‘last year and analysts predict a gain of more than 14% by 2025.

Delta Airlines, Walgreens Boots Alliance and Constellation Brands kick off the reporting season on Friday, with the big banks due next week.

For tech companies there was good news from Taiwan, with the world’s largest contract chip maker TSMC reporting fourth-quarter earnings that easily beat forecasts as it benefited from the demand for artificial intelligence.

Abroad, bond market turmoil also increased around the world this week, with the British government bond market in the spotlight as 30-year gilt yields there hit record highs of 27 years and the 10-year benchmarks reaching levels not seen since 2008.

While these rises in gold yields are largely in line with what has happened to US Treasuries, a worrying development in the UK is that sterling has also fallen back in line and stopped trailing the highest national returns.

Gilts were flat early on Friday, but yields remained below weekly highs and the pound recovered some ground from Thursday’s 14-month low against the dollar.

Shares in Asia were under pressure, with the main Chinese and Japanese indexes each falling more than 1%.

China’s inflation numbers on Thursday showed the country was still struggling against widespread deflationary pressures.

China’s central bank is expected to deploy its most aggressive monetary tactics in a decade this year as it tries to stimulate the economy and soften the blow of looming US tariff hikes, but in doing so risks ‘exhaust their firepower.

The People’s Bank of China’s announcement on Friday that it has suspended purchases of Treasury bonds due to asset shortages highlighted the constraints on its resources as it faces an economic environment each harder time

Key developments that should give further direction to US markets later on Friday:

* December US employment report, University of Michigan January consumer sentiment survey, December Canadian employment report

* US Corporate Earnings: Delta Airlines, Walgreens Boots Alliance, Constellation Brands

* British finance minister Rachel Reeves will visit China

(By Mike Dolan, Editing by Gareth Jones; [email protected])

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