US Jobs Report in Focus as Bond Traders Bet on Fed Rate Hike by 2027
By Aboki Forex —
Bond traders are watching this week’s US jobs report closely. They want to confirm their bets that the US economy is strong enough to push the Federal Reserve to raise interest rates by next year.
Beyond the Middle East conflict, the big event is Friday’s monthly employment data. Analysts expect the report to show the labour market stayed resilient in May. Combined with high oil prices and rising inflation, that could strengthen the case for the Fed to drop its easing bias at its June meeting. That meeting will be the first under new Chairman Kevin Warsh.
Traders now see a rate hike by mid-2027, if not sooner. The spike in energy prices from the Iran war has upended earlier expectations that Warsh would cut rates soon after taking over.
According to Bloomberg Economics, the jump in bond yields since the conflict started has already tightened financial conditions by about 0.75 percentage points of Fed rate increases.
“Yields have risen, and it’s adding restrictiveness to the US economy and doing the work of the Fed,” said George Catrambone, head of fixed income at DWS Americas. As rates climb across maturities from two to 10 years, he said, “you’re really creating some headwinds that will eventually come through.”
Catrambone also warned that hot inflation is hurting wage growth. That, plus mounting stress on the American consumer, will weigh on the economy. He favours owning two-year notes and has bought the 10-year near recent peaks.
Benchmark 10-year yields are down from their peak a couple weeks ago. But they rose three basis points to 4.47% in Asia on Monday as oil prices rebounded from a six-week low. Signs that a resolution to the war remains elusive are driving the move. The rise is spilling into other markets. Australia’s 10-year yield lifted six basis points.
Still, 10-year rates, which guide mortgages and corporate borrowing, are roughly half a point above levels at the end of February. One options trade last week targeted the 10-year yield rising above 5% within months. That level has not been seen since 2023.
All this puts added importance on the May employment report. It follows a slew of other labour indicators this week, including job openings and ADP Research private-sector hiring data. The US economy likely added about 90,000 jobs, keeping the unemployment rate steady at 4.3%, according to a Bloomberg survey.