• Economic reports seen as more important than policy speeches
  • Fed may have lowered bar for conditions that warrant rate rise

If the past month is anything to go by, bond traders will dial into every piece of economic data that comes out until the next Federal Reserve meeting -- and not much else.

Gauging by market moves, traders were more focused on U.S. economic reports in October than on an array of conflicting speeches from central-bank officials. Economic readings should be even more important going into the end of the year after last week’s Fed statement rekindled expectations that policy makers may raise rates at their December meeting. Investors should pay closer attention to next week’s jobs and manufacturing data than to the several speeches on the docket from Fed voters, according to Thomas Simons, a money-market economist at Jefferies Group LLC.

"The data is going to matter more," Simons said from New York. "It’s an information overload to some extent with the speakers. The individuals are important, but we already had pretty direct communication of the consensus from the Fed."

In Wall Street’s view, the Fed’s Oct. 28 statement may have lowered the bar for the economic conditions that would warrant a December rate increase.

The policy-setting committee said it would consider at its December meeting whether to raise rates. That’s the most specific reference to a single meeting since the end of 1999, which was followed by a rate increase two months later, according to David Ader, head of rates strategy at CRT Capital LLC. Last week’s Fed statement prompted the biggest rise in the two-year Treasury yield since March.

"It felt like a big change in tone and policy from what we saw in September," said Peter Tchir, head of macro strategy with Brean Capital LLC. "They have a lower hurdle" for a rate rise, so even moderately good data could "spook the market a little bit."

Data-Dependent

For the week, the two-year yield rose eight basis points, or 0.08 percentage point, to 0.72 percent. The 0.625 percent security due in Sept. 2017 fell 5/32, or $1.56 per $1,000 face amount, to 99 26/32.

The likelihood that futures traders assign to a rate increase by the end of the year rose to 50 percent from 36 percent a week earlier. The calculation is based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The next key data point will be the Labor Department’s employment report on Nov. 6. Economists surveyed by Bloomberg expect 180,000 jobs were created in October, up from 142,000 the month before.

The government’s Oct. 2 payroll report, which showed September job creation missed economist forecasts, sent two-year Treasury yields down about 11 basis points in 30 minutes, the sharpest immediate reaction to any jobs report in at least a year, according to Bloomberg data. And a report two weeks later showing September retail sales rose less than forecast sent yields down seven basis points.

Those reactions eclipsed the market’s response to calls for patience in raising rates from Fed Governors Lael Brainard and Daniel Tarullo on Oct. 12 and 13. Two-year Treasury yields fell just two basis points over that period. And although Federal Reserve Bank of New York President William C. Dudley pointed to signs of a slowing economy on Oct. 15, yields rose that day on news that consumer prices excluding food and fuel rose more than forecast.

Even a signal from European Central Bank President Mario Draghi to expect quantitative easing from the ECB didn’t do much for the two-year Treasury note, as yields fell just two basis points that day.

That means strategists may get a break from their duties parsing Fedspeak, at least until the next policy statement.

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