Disappointing April Jobs Report: Lower June Rate Hike Odds?


May. 7 2018, Updated 3:00 p.m. ET

Bond market 

US bond market yields cooled off after hitting a four-year high at the end of April. Bond yields fell after the April employment report was lower than expected. There were only 168,000 non-farm jobs added in April—compared to the market’s expectation for more than 190,000 job additions. The other important variable in the report is the average hourly earnings. The average hourly earnings increased 0.1%, which kept the annual increase at 2.6%. The unemployment rate dropped below 4% for the first time in 20 years, which was the highlight of the report. Lower-than-expected job additions and a marginally dovish FOMC statement in the same week led to the decline in the bond yields along the curve. The Vanguard Total Bond Market EFT (BND) tracks bond markets’ performance. BND ended the previous week at 78.88 and depreciated 0.16% for the week ending May 4.

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Bond market’s performance and speculator positions

For the week ending May 4, the ten-year (IEF) yield closed at 3% and depreciated by 0.8 basis points. The two-year yield (SHY) closed at 2.50%—up by two basis points. The longer-term 30-year yield (TLT) closed at 3.1%—down by 0.4 basis points. The change in the yields continued to flatten the curve in the previous week.

According to the latest Commitment of Traders report, released on May 1 by the Chicago Futures Trading Commission, speculators’ short positions increased last week. The total net bearish positions as of May 1 decreased by 16,455 contracts from 462,133 contracts to 462,133 contracts.

Bond markets this week                                                                                               

This week, the key data for the bond markets (BSV) are the inflation print on Thursday. The index is expected to increase 0.3% in April. Lower-than-expected inflation growth could push the ten-year yield below 2.90%, while the opposite could retest of the 3% yield. Any outcome likely won’t change the odds for a June rate hike. A hike by 25 basis points is already priced into the yield. The CME FedWatch Tool indicates a 95% probability of a June rate hike. Traders will likely remain focused on the $73 billion Treasury auction and geopolitical developments in the Middle East.


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