Last week’s strong economic data hardly had an effect on Treasury markets. On Friday, traders will be watching to see if that dynamic repeats itself.
The U.S. is expected to report that 950,000 jobs were created in April. The figure could easily come in higher than 1 million, strategists say, but it isn’t yet clear that will revive the selloff that struck the bond market at the beginning of this year.
March’s blowout report certainly didn’t. Yields briefly climbed after last month’s superb numbers, but started to fall shortly afterward. A steep rebound in retail sales figures didn’t persistently lift yields either, puzzling some analysts and giving the impression that a lot of good economic news was already reflected in the market’s prices.
Yields have more recently gotten a leg up from their April 22 lows, but that has been driven primarily by inflation expectations, meaning that markets are taking the Federal Reserve’s assurances about easy policy seriously. The break-even inflation rate, or the amount of inflation at which a Treasury Inflation-Protected Security would be equally attractive to a normal Treasury, is about 2.4% for the next 10 years, data show.
At the moment, markets are pricing in the Fed’s first rate increase in early 2023, according to Bloomberg data. But a second consecutive month of job creation around 1 million may get traders betting again that the Fed will either pull forward its timeline for reducing bond purchases, or that it will raise rates more quickly once it starts tightening policy.
“While that’s not enough progress to commence tapering [the Fed’s bond-buying program], it should be enough to at least start talking about it,” wrote
and Tom Simons, money-market economists at Jefferies.
And when yield increases are driven by Fed expectations, they can affect the stock market as well. One of the factors that made the first-quarter selloff such a point of concern for strategists and investors was that it came with some sharp increases in real or inflation-adjusted yields. When investors can earn an inflation-adjusted return on Treasuries (or smaller inflation-adjusted losses), it makes riskier markets such as stocks less attractive.
think that while there could be a market overreaction to jobs or other economic data that pushes the market’s inflation gauges higher, fueling declines in Treasury markets, any long-term trend higher in Treasury yields will need to come from inflation-adjusted yields. Their year-end target for the 10-year yield is 1.9%, however, which is a shorter trip from recent levels around 1.6% than there was at the start of the year, when yields were only trading around 0.9%.
It isn’t clear that two strong jobs reports in a row will be enough to spook bond investors into pricing a tighter Fed just yet, however. It is possible that strong spring and summer employment data is already reflected in market prices, and that the market’s views won’t change much after two months of strong data.
Find more jobs data and bond-market-moving events below, with all times Eastern and economist estimates from Bloomberg:
Purchasing managers’ index: Markit kicks off the week’s economic reports with a final survey on manufacturing activity, due out at 9:45 a.m. The gauge is expected to come in at 60.7 for April, nearly in line with the last reading. Anything above 50 indicates growth. Shortly after that, at 10 a.m., the Institute for Supply Management is expected to report that its own gauge of manufacturing rose slightly to 65 for April.
Construction spending: Construction spending is expected to rebound in March from the month before, when surprise inclement weather put a damper on activity across much of the U.S. It is expected to rise 1.9%, compared with a 0.8% decline the month before.
Treasury refunding announcement, part 1: The U.S. Treasury will announce its quarterly borrowing and cash-balance estimates at 3 p.m. This will be a point of interest as the reinstatement of the debt ceiling approaches; the Treasury will need to run down its cash holdings ahead of the August deadline, which could push short-term interest rates below zero. The Treasury has also reported consistently higher-than-estimated cash balances since the start of the pandemic, but a reinstated debt ceiling would put a hard limit on that.
Factory orders and durable goods orders: March’s factory orders are expected to rebound from the prior month and rise 1.5%, compared with a 0.8% decline the month before. The month’s final measure of durable goods orders will also be reported at 10 a.m.—the preliminary figure was an increase of 0.5%.
ADP employment data: ADP is expected to report 875,000 jobs were created in April in its monthly report, seen as a rough preview of the government’s jobs data. Last month’s didn’t provide too many signs of the blowout report, however, as ADP just reported job creation of 517,000, compared to the government’s repot of nearly 1 million. The report is due out at 8:15 a.m.
Service-sector PMIs: The Institute for Supply Management and Markit are expected to report more growth in the service sector of the U.S. economy in their latest surveys, with Markit expected to report a final reading of 63.1 for March, and ISM is expected to report its index at 64.1. Markit is due to report its figures at 9:45 a.m. and ISM is slated for 10 a.m.
Treasury refunding announcement, part 2: The Treasury will report more details on its auction and financing plans for the coming quarter at 8:30 a.m. And while headlines about government stimulus might give the impression that the U.S. will need to boost its borrowing, Wall Street may soon focus on when the Treasury will start to reduce its bond sale sizes. That’s because it has had a persistently high cash balance in recent quarters and has pushed to extend the maturity of its borrowing over the past several years. Strategists don’t expect much change, but say it might reduce the size of its 7-year and 20-year sales.
Jobless claims: Economists are forecasting 540,000 in initial claims for unemployment insurance during week ended May 1, a slight deceleration from the 553,000 the week before.
Financial stability report: The Federal Reserve is scheduled to release its next report on financial stability at 4 p.m.
Jobs report: See above. Beyond the 950,000 jobs created, the unemployment rate is expected to decline to 5.8% from 6%. Hourly earnings are expected to decline 0.4% in April from the year before, compared to a 4.2% increase in March.
Write to Alexandra Scaggs at email@example.com