Fed Hike Odds Jump to 64% From Coin Toss as Payrolls Test Looms

  • Treasuries poised for biggest weekly decline since mid-July
  • Jobs data beating forecasts may spark selloff: Nomura’s Gorman

U.S. Adds 156,000 Jobs in Sept., Jobless Rate at 5.0%

Traders that put the odds of a U.S. interest-rate increase in 2016 at no better than a coin toss last week now see the chances at almost two-in-three after a string of strong economic data.

As a crucial test looms Friday with the release of monthly payrolls report, Treasuries are headed for their worst week since mid-July after reports showed the fastest expansion in services companies in almost a year and a rebound in manufacturing. Two-year Treasury yields, which are more sensitive to the outlook for monetary policy than longer tenors, reached a four-month high. Yields on 10-year notes were set to cap a five-day advance as the pound’s steepest drop since the Brexit vote spurred demand for safer assets.

“If the payrolls number comes out around 200,000 or so, just slightly above where people are expecting, there could be a little bit of a selloff” in Treasuries, said John Gorman, the Tokyo-based head of non-yen rates trading for Asia and the Pacific at Nomura Holdings Inc., a primary dealer in Japan and the U.S. “The Fed needs to be a little bit more concerned about what’s going on in the U.S. rather than externally, and the economy is improving. I think they’ll probably be looking to hike in December.”

The 10-year Treasury yield slipped one basis point to 1.73 percent as of 6:53 a.m. in London, poised to halt its longest run of increases since April. The two-year note yielded 0.85 percent, little changed from Thursday, when it reached the highest since June 3.

Payrolls Data

The Bloomberg Barclays U.S. Treasury Total Return index dropped 0.8 percent for the week as of Thursday, on track for the biggest decline since the period ended July 15. The market-implied probability of a Federal Reserve rate increase this year has climbed to 64 percent from 51 percent at the start of last week.

“The pound’s drop certainly can’t be ignored,” said Philip Wee, senior currency economist at DBS Group Holdings Ltd. in Singapore. “This sort of gives pause to everyone in terms of whether they should be single-minded on the U.S. story alone, or whether they should keep one eye on what’s happening in Europe,” he added, referring to the U.K.’s decision to leave the European Union.

The Labor Department’s employment report due Friday is projected to show a pickup in job gains last month. The U.S. probably added 172,000 people to payrolls and the unemployment rate held steady at 4.9 percent, according to the median estimates of economists surveyed by Bloomberg.

The Bloomberg U.S. ECO surprise index -- which measures whether economic data have exceeded or fallen short of analysts’ estimates -- has surged this week and is now positive for the first time since August.

Watch Next: Markets Await U.S. Jobs Data

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE