TREASURY WRAP: T-NOTE FUTURES (U6) SETTLE 4+ TICKS HIGHER AT 108-20+
Treasury curve bull steepens on weak July jobs report. At settlement, 2-year -4.1bps at 4.206%, 3-year -4.0bps at 4.267%, 5-year -3.4bps at 4.362%, 7-year -2.4bps at 4.505%, 10-year -1.6bps at 4.660%, 20-year -0.8bps at 5.219%, 30-year -0.5bps at 5.215%.
THE DAY: Treasury yields were lower across the curve on Friday, led by the front end, after a surprisingly weak Nonfarm Payrolls report. The headline showed the US economy shed 23k jobs in July, well below expectations for a 91k increase, while the prior month's gain was revised down to 20k from 57k. May was also revised lower by 66k to 63k, leaving the two-month net revision at -103k and suggesting the labour market may not be as strong as previously thought. The July job losses were concentrated in government (-53k) and leisure and hospitality (-40k).
Although clearly a soft report, the unemployment rate unexpectedly fell to 4.1% from 4.2%, moving further below the Fed's 4.3% year-end median projection, although the decline came alongside a lower participation rate. The improvement in the jobless rate will provide some reassurance to Fed officials, but the outright decline in payrolls and sizeable downward revisions will likely raise concerns over the underlying trend in hiring. Fed's Barkin said the unemployment rate remains the best measure of labour market health, although he acknowledged the jobs data "does not feel very good."
Following the report, markets pared hawkish Fed bets, with money markets now assigning around a 44% probability of a September rate hike, down from 56% beforehand. With September essentially a coin toss, attention now turns to July CPI on August 12th and PPI on August 13th, followed by July PCE on August 26th. Importantly, markets will also receive the August employment and inflation reports before the September 16th FOMC decision and updated dot plot, leaving plenty of data to shape expectations. This takes on added importance given the Fed's move away from explicit forward guidance under Chair Warsh.
Elsewhere, geopolitics took a back seat, with little fresh news of consequence for rates traders. Iran's National Security Commission is still expected to release details of the proposed Iran-Oman agreement, although reports on Thursday suggested the framework contains terms unlikely to be acceptable to the US, raising questions over whether a broader agreement can ultimately be reached. Meanwhile, tensions between Saudi Arabia and the Houthis remain elevated.
Alongside next week's CPI and PPI reports, Treasury supply will return with the 3-, 10- and 30-year auctions, providing another test of demand across the curve.
SUPPLY
Notes/Bonds
- US to sell USD 58bln of 3yr notes on August 11th, USD 42bln of 10yr notes on 12th August, and USD 25bln of 30yr on August 13th; all settling on August 17th
Bills
- US to sell USD 92bln of 13-week bills and USD 79bln of 26-week bills on August 10th; to sell USD 95bln of 6-week bills on August 11th; all to settle on August 13th
STIRS / OPERATIONS
- Fed Pricing via CME Fed Watch: Sept 11bps (prev. 14.18bps), Dec 28.6bps (prev 33.9bps).
- EFFR at 3.63% (prev. 3.63%), volumes at USD 113bln (prev. USD 114bln) on August 6th
- SOFR at 3.65% (prev. 3.64%), volumes at USD 3.055tln (prev. USD 2.989tln) on August 6th
- NY Fed RRP op demand at 1.45bln (prev. 1.43bln) across 2 counterparties (prev. 6) on August 7th
A negative headline payrolls print with large downward revisions is the combination that has historically done the most damage to a hawkish front end: the miss alone can be dismissed as noise, but revisions of this size have tended to mark the point where a soft patch starts to look like a trend, and the curve response here, a bull steepening led by twos, is the textbook expression of repriced near-term policy expectations rather than a duration bid. The wrinkle worth flagging is the falling unemployment rate alongside job losses, which is the participation-rate artefact that has complicated Fed reads of weak payrolls prints on previous occasions; officials in this position have historically pointed to the jobless rate, as Barkin did, as the cleaner signal, and that tension is what keeps the meeting in play rather than fully repriced. The other unusual feature is the direction of the tail risk being pared: markets were pricing a meaningful probability of a hike, so the move removes hawkish premium rather than adding easing premium, which is why the front-end rally has been measured rather than violent. The established sequence from here is that the next inflation prints carry outsized weight precisely because the payrolls signal is muddied, and two more employment reports before the September decision and dot plot leave the pricing genuinely two-sided. The immediate tests are the CPI and PPI releases and the 3-, 10- and 30-year auctions, where concession-building into supply against a softer data backdrop has tended to flatten some of the initial steepening; weak tails at the long end would confirm the market's willingness to underwrite duration even with the policy path unresolved.