Market Brief: Bond Market Turmoil Eases As Labour Markets Slow

A fragile sense of calm is returning to financial markets this morning as investors revert to betting on an aggressive easing cycle from the Federal Reserve. The yield on the 30-year US Treasury is back down to 4.88 percent after flirting with the 5-percent threshold, long-dated bonds in both the UK and Japan are coming off levels last hit in the nineties, and spreads within the euro area are contracting, pointing to an easing in funding concerns. North American equity futures are pointing to a mildly-positive open, and the dollar is holding steady against its major counterparts ahead of tomorrow’s all-important non-farm payrolls report.

Evidence of a labour market slowdown in the world’s largest economy continues to accumulate. The Job Openings and Labor Turnover Survey, released yesterday, showed that the layoffs and discharge rate held steady at 1.1 percent in July, while the quits rate remained unchanged. However, job openings dropped by 176,000 to a downwardly-revised 7.18 million from the previous month. Net labour demand—the number of employed workers plus job vacancies—fell below labour supply, measured by the pool of unemployed individuals, for the first time since the pandemic. Data from the Bureau of Labor Statistics and ADP this morning revealed an unexpected jump in initial jobless claims alongside a slowdown in private-sector job creation.

Markets expect the Fed to respond. In a speech given at the Jackson Hole Economic Symposium two weeks ago, Jerome Powell signalled an implicit change in the central bank’s reaction function, appearing to downplay inflation risks while noting that the labour markets had arrived at a “curious kind of balance that results from a marked slowing in both the supply of and demand for workers,” warning that “downside risks to employment are rising,” and suggesting that this “shifting balance of risks may warrant adjusting our policy stance”. Market-implied odds on a rate cut at the Fed’s September meeting are holding near 97 percent, and traders have five moves priced in over the next year.

A disappointing print tomorrow could add to the monetary tailwind pushing stock markets, commodity prices, and high-yielding currencies upward. After tightening policy en masse as they worked to head off a historic inflation surge immediately after the pandemic, central banks began to reverse course in late 2024, and the drumbeat of rate cuts has continued this year, helping to reduce global borrowing costs and suppress volatility. If a labour market slowdown forces the Fed onto a more aggressive easing trajectory, a late-year melt-up in asset prices could become more likely.

But the data remains ambiguous. A series of releases in recent weeks have painted a contradictory picture of underlying fundamentals in the American economy, and anecdotal evidence extracted from yesterday’s Beige Book survey would suggest that businesses are turning slightly more optimistic on the future. It’s not our base case, but hiring could remain surprisingly robust, and turn even more positive in the months ahead as consumer demand powers more growth.

All of which is to say: tomorrow’s print could prove unusually important for foreign exchange markets. Average implied overnight option volatility—a measure of expected swings—in the major currency pairs is sitting at levels last exceeded during Trump’s tariff turmoil, the 2024 presidential election, and last September’s payrolls report. Against this backdrop, it makes sense to have automated market orders in place to protect against negative outcomes and harness favourable moves.

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