(Bloomberg) — US Treasuries fell after stronger-than-expected US employment data showed tariff uncertainty hasn’t hit the nation’s jobs market yet, prompting traders to trim bets on imminent interest-rate cuts.
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The declines on Friday pushed yields on two- to five-year notes higher by more than 10 basis points after non-farm payrolls rose 177,000, above all estimates compiled by Bloomberg. Traders pulled back on bets for Federal Reserve rate reductions, pricing in 79 basis points of total easing this year, compared to around 90 basis points before the report.
Traders pared their expectations for a rate cut in the coming months, only pricing in the next move in the second half of the year. Economists at Goldman Sachs and Barclays pushed back their forecasts for the Fed to lower its benchmark to July, rather than June, after the data.
The Fed is “going to have to wait until they see any kind of impact in terms of a rise in the unemployment rate,” Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., said on Bloomberg Television. “None of this data reflects the impact of the shock, and we will have to see that data show up.”
Two-year yields are on course for their largest two-day rise since October as investors rethink bets that President Donald Trump’s tariffs will quickly slow the world’s largest economy. On Thursday, bonds fell after a manufacturing survey came in stronger than anticipated.
For investors, it’s a question of how to weigh the economic pessimism that has been seen in some recent surveys against the resilience in top-tier measures of employment such as Friday’s jobs report. US consumer confidence fell in April to an almost five-year low.
Traders in the futures and options markets trimmed back their expectations for the Fed, fully pricing in only three quarter-point rate cuts before the end of 2025, versus four earlier in the week. Only 24 basis points of easing are priced in for July, just shy of a full quarter-point cut. There’s about 46 basis points of cumulative easing priced in by September.
One popular trade has emerged that stands to benefit should the Fed refrain from cutting rates at all this year. That position was bought again in the lead-up to the employment report.
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“Cutting in late July allows the committee to see more data on the evolution of the labor market, and should benefit from resolving uncertainty about tariffs and fiscal policy,” Barclays chief US economist Marc Giannoni and his colleagues wrote in a note on Friday, adjusting their forecast to a July move from a June one.
Goldman Sachs economists led by Jan Hatzius also pushed back their forecast for the Fed to cut rates to July from June, citing payrolls and manufacturing survey data.
In the aftermath of Friday’s data, a couple of large futures block trade in both 5- and 10-year note contracts added to the downside pressure and kept yields supported near highs of the day. The combined risk weighting across the two sales was equal to just over $1 million per basis point move.
Complicating matters for the economic outlook is uncertainty over what tariffs will eventually be instated and when, as US negotiations with key trading partners are underway or being planned. China has quietly started to exempt some US goods from tariffs that likely cover around $40 billion worth of imports, in what looks like an effort to soften the blow of the trade war on its own economy. Japan, meanwhile, said trade discussions will likely gain momentum in mid-May.
For now, Fed officials have been waiting to see what top-tier economic data reveals, while remaining an guard against the possibility that tariffs will push up inflation. Speaking in late April, Fed Governor Christopher Waller said that he’d support rate cuts if there’s a significant rise in unemployment, which could happen if Trump reinstates more aggressive tariff levels and firms begin laying off more workers.
“We know that all of these singular data points can be noisy, so you still need to see some consistency of data for the Fed to act,” said Kristina Campmany, a senior portfolio manager at Invesco, in an interview. Money market pricing reflects the “bimodal” risks to the outlook which could see the Fed stand pat on rates or cut aggressively, she said.
The labor data offers the last major reading of the US economy’s health ahead of the Fed’s two-day gathering next week. Traders and economists alike expect the Fed to keep rates on hold when they meet next week, despite pressure from Trump to cut rates. The Republican renewed his call for lower rates on Friday in a social media post.
There’s been “no major effect from the April tariffs in the labor market so far,” said Evelyne Gomez-Liechti, a strategist at Mizuho. “The Fed is in no rush to cut rates, especially given the increased policy uncertainty, which is creating risks to both sides of their dual mandate.”
