Bond prices in the U.S. moved higher at the start of the trading day. They retreated by the end of it. Treasuries opened with a sharp rise following the release of the Labor Department's employment data. They gave back much of that gain as crude oil prices climbed amid regional tensions.
Labor market surprise
The employment report showed a drop in non-farm payrolls for the first time in over a year, with 23,000 jobs lost in July. That followed a revised gain of 20,000 in June, down from the original figure of 57,000. The decline came as a surprise to economists, who had expected a rise of 88,000 jobs. US employers unexpectedly lost 23,000 jobs in July and gains for the previous two months were revised down sharply by a combined 103,000 jobs, painting a weaker picture of the labor market than past data indicated. The unemployment rate, however, held steady at 4.1%. Economists had projected an unchanged unemployment rate and 83,000 new jobs for the month. The private sector, however, gained 30,000 jobs, with growth focused once again in healthcare. Hourly earnings of all employees changed little over the past year, increasing by 3.2% compared to last year. Figures for May were revised to 63,000 jobs added, down from an initially reported 129,000 jobs, while figures for June dropped 37,000, to 20,000 jobs added. In June, the US added 57,000 jobs, about half of what economists had predicted, with most of the growth concentrated in healthcare and social assistance.
The weaker-than-expected numbers led to a brief rally in the bond market, with the yield on the ten-year Treasury note falling to 4.603 percent. However, the decline in the yield only lasted through the morning session. The unemployment rate fell from 4.2% to 4.1%, but only because fewer people are actively looking for work. Labor force participation dropped to 61.4%, down 0.8 percentage points from a year ago.
Rate hike odds and political uncertainty
The release of the employment data reduced expectations of a rate hike from the Federal Reserve in the coming month. According to the CME FedWatch tool, the probability of a 25-basis-point increase in the Fed's benchmark rate fell. It went from 55 percent to 44 percent by the end of the week. After the BLS released its findings, the implied odds of a September hike fell to roughly 44% from about 57%. Though the Fed held rates steady last month, officials indicated that they expect at least one rate hike before the end of the year to combat price increases. The annualized inflation rate in June was 3.5% – 0.8% higher than a year prior. Inflation data scheduled to be released next week will probably be “the deciding factor” for the next rate meeting, Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said in a statement. “If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it,” she said.
Despite the drop in rate hike odds, treasuries retreated from their session highs after crude oil prices climbed. That move came on the back of renewed tensions in the Middle East, including attacks on Saudi and Yemeni military installations by the Iran-aligned Houthis.
Oil supply concerns
Iran warned it will restrict the movement of U.S. and Israeli vessels in the Strait of Hormuz. A proposed draft bill would impose fines of up to 20 percent on cargo values. This is for ships violating the new rules. The Strait of Hormuz is a key artery for global oil flows. Iran said a deal with Oman to manage traffic through the channel will not fully reopen it.
These developments increased fears about the stability of oil supplies, contributing to a sharp rise in crude prices. That in turn led to a shift in investor sentiment, drawing money away from safe-haven assets like Treasury bonds.