On Thursday, short-term Treasury yields declined after investors reacted to weaker-than-expected jobs data, indicating the Federal Reserve might pause rate hikes. The benchmark 10-year yield edged up one basis point to 4.485%.
June's nonfarm payrolls rose by a seasonally adjusted 57,000 - far short of the 129,000 gain in May and the Dow Jones consensus estimate of 115,000.
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BMO Capital Markets' head of U.S. rates strategy, Ian Lyngen, commented, "Overall, this morning's data makes it difficult to envision a path toward a July Fed hike even if there is upside in the inflation data yet to be realized. The probability of a July cut have declined sharply, consistent with the read that payrolls have made it challenging to envision a summertime hike."
Because of the July 4 holiday, the jobs data came out one day earlier than usual. This report is among several key economic releases this week. Separately, in Sintra, Portugal, Federal Reserve Chair Kevin Warsh mentioned to CNBC's Sara Eisen during a panel at the ECB's annual conference that prices are "too high." "We've all looked around, and we've seen that prices are too high," Warsh remarked, referring to the conference delegates. "If there were people in household or the business sector, in the financial markets, who thought that this central bank was going to be comfortable with an inflation objective above 2%, well, I guess they'd be disappointed," Warsh added. "We're going to deliver price stability in the U.S."
The weak jobs report underscores the conflicting signals facing the Federal Reserve. While inflation remains above the central bank's 2% target, a softening labor market could give policymakers reason to pause. The next Federal Open Market Committee meeting is set for July 25-26, and traders are now pricing in a lower chance of a rate increase. The divergence between the two- and ten-year yields reflects this uncertainty, with short-term rates falling on dovish expectations while longer-term rates rise on persistent inflation concerns.
The 2-year yield serves as a close proxy for near-term Fed rate expectations, so its drop suggests traders are now pricing in a lower probability of a July rate increase. Meanwhile, the slight uptick in the 10-year yield implies that longer-term concerns about inflation or economic growth persist. This split between short- and long-term yields highlights the uncertainty surrounding the economic outlook, especially after a payrolls number that came in roughly half of what was anticipated. With the Fed's next meeting only weeks away, investors will be watching incoming data closely for further clues on the central bank's next move.
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