July Rally Today‼️
Treasury Bonds Rise on Weak Employment Data, Lowering the Chances of a Fed Rate Hike
1. An Unexpectedly Weak Labor Market Allays Fears of Overheating
Non-farm payrolls rose by just 57,000 (113,000 expected), with previous months revised downward, and the unemployment rate fell to 4.2% amid a sharp drop in the labor force participation rate. Economists interpreted this as a sign of slow, steady labor market growth, rather than overheating requiring rate hikes.
2. Expectations for a Quick Fed Tightening Collapse
Traders sharply reduced the likelihood of a July rate hike from 33% to 20%, with only about 31 basis points of hikes priced into December (just over one 25-bp increment). Two-year note yields fell 5 bps. to 4.13%, while the dollar posted its sharpest decline in two months.
3. "An Excellent Report for the Fed's Patience" and Support from Oil Prices
Fed Chair Warsh previously stated that inflation risks were easing, and employment data, according to BlackRock and Fort Washington managers, removes the urgency from the rate hike debate. An additional disinflationary factor was the drop in oil prices to levels before the US attack on Iran in February amid progress in peace talks.
4. Massive Short Coverage and a Revised Wall Street Forecast
Ahead of the report's release, the market accumulated record short positions in short-term bonds, and the weak figures triggered a forced closeout (a rally). The spread between 2- and 10-year notes widened, almost recouping the decline after the hawkish June meeting. This calls into question recent forecasts from Bank of America, Deutsche Bank, and Barclays, which had been projecting additional rate hikes.
Wishing everyone profits💰💪
