US Treasuries extended their rally, with the policy-sensitive two-year yields hitting a 14-month low, as market expectations for Federal Reserve rate cuts intensified following Wednesday’s decision. Swaps traders now anticipate three rate cuts this year, up from two previously. The broader risk-off sentiment was driven by data revealing that US weekly unemployment claims reached a near one-year high, coupled with a contraction in manufacturing activity. Economists predict a slowdown in job growth in the government’s July employment report, due Friday, with the unemployment rate expected to hold steady at 4.1%.
The hard landing’ scenario is becoming more likely. If tonight’s non-farm payrolls report disappoints, the situation could worsen. Should the unemployment rate inch toward 4.3% with job additions slowing to below 100,000, it could trigger significant market turmoil.
In the commodities market, oil prices rebounded after a decline on Thursday, driven by concerns that Middle East tensions might disrupt supply. Gold prices also climbed amid the heightened economic uncertainty.
The labor market data has underscored the fragility of the US economy. With unemployment claims rising and manufacturing output shrinking, the Fed’s dovish shift reflects growing apprehensions about the economic outlook. Interest-rate swaps now suggest that traders are fully pricing in a series of cuts, with a total of nearly 70 basis points of reductions expected by year-end.
The Fed is clearly responding to a weakening economic landscape, The upcoming jobs report and CPI data will be crucial. Positive outcomes could reinforce the Fed’s current trajectory, while any negative surprises might accelerate their accommodative measures.
As investors brace for the July employment report, the focus remains on key economic indicators that will shape the Fed’s policy direction in the coming months.