By: Editorial Team, StoneX Media
Without Fed forward guidance, markets are pricing the Federal Reserve's next move largely from incoming economic data, so every release now does more of the work that policy signals used to do. That shift was on full display around the latest U.S. nonfarm payrolls report, when job growth came in far below estimates and the odds of a Fed rate hike at the October meeting dropped sharply. Yet the reaction in U.S. Treasury yields did not hold, with the curve giving back its initial steepening as the session went on. For rates markets, the absence of Fed forward guidance has created an uneasy mix of heightened sensitivity to data and growing doubt that the data can carry the weight placed on it.
Shriya Samarth is Executive Director and Head of Rates, EMEA at StoneX in London, a G3 rates specialist who covers fixed income and interest rate derivatives, tracking U.S. and European sovereign debt, yield curve positioning and central bank expectations.
"Overall, the markets are still trying to make sense of what good data looks like and what the Fed is going to do in a world without forward guidance," Samarth says. Federal Reserve rate expectations have swung hard as a result, with the odds of an October rate hike sliding from around 70% days before the payrolls report to just under 20% after it. The slide came in two steps, first when personal consumption expenditures (PCE) inflation came in cooler than expected, with the August core month-on-month reading at 0.2%, and then again after the jobs miss. In practice, Fed pricing is being assembled from a sequence of data points rather than from policymakers' signals, so each release carries more of the weight in setting rate expectations. For institutional rates participants, a market built on extrapolation and assumptions can reprice quickly whenever the next print surprises.
U.S. nonfarm payrolls have been revised lower in about 11 of the last 12 reports, a pattern that weakens the signal rates markets can take from any single first print. The latest report followed that trend, with the previous month cut from 162,000 to 133,000, although the markdown was less severe than some earlier revisions. Fewer survey responses in previous reports have added to the concern, while government jobs were the main driver of the weaker headline. According to Samarth, "NFP is becoming one of those data prints that has to have some questioning behind it". Consequently, the U.S. Treasury yield reaction to payrolls is proving less durable, evidenced by a bull steepening led by a roughly seven basis point drop in the two-year yield that retraced as the session wore on.
--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Shriya Samarth, StoneX Head of Rates, EMEA
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