The yield on US Treasury bonds has declined moderately, while market participants are preparing for the publication of key US data that may affect the outlook for the Fed's monetary policy.
The yield on 5-year Treasury bonds fell by 4.7 basis points, reaching 3.844%, while the yield on 30-year bonds was 3.71% (-4.2 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, fell by 3.9 basis points to 4.44%, while the yield on 10-year bonds declined to 3.659% (-4.3 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 78 basis points.
The key event of this week will be the publication of data on the US labor market, namely the JOLTs Job Openings report for October and nonfarm payrolls for November. The nonfarm payrolls increased by 261 000 in October, which again exceeded expectations. Nevertheless, there were some signs in the data that there were “cracks” in the labor market. Employment, as measured by the household survey, fell by 328 000 in October, and the labor force participation rate returned to the level it was at the beginning of the year. Economists expect a further slowdown in job growth in November (+200 000) and in the following months. The number of layoffs, according to initial jobless claims and the JOLTS report, remains low, but layoffs are only half of the net hiring equation. The demand for additional workers seems to be declining. The number of vacancies, hiring plans, employment sub-components of the PMI and consumer opinions about the labor market - all this has worsened since the spring. In addition to the nonfarm payrolls, data on average hourly wages will also be crucial for Federal Reserve policymakers. It will take more than normalizing supply chains to bring inflation back to 2%, and slowing wage growth is another important piece of the puzzle.
The minutes of the Fed's November meeting showed that the Fed will continue to raise interest rates in the coming months, but at a slower pace. Futures markets show that investors now expect US rates to peak just above 5% by May next year, and estimate a 72.3% chance that the Fed will switch to a 50 basis point rate hike at the December meeting.