US Treasury yields steadied, with the 10-year yield holding at 4.75%, following a volatile week driven by uncertainty over the Federal Reserve's next interest rate decision. This calm comes ahead of the critical August payrolls report, which economists expect to show a 55,000 increase in jobs and an unemployment rate holding at 4.1%. Traders are looking for a jobs report that is weak enough to deter a rate hike but not so weak as to signal a recession, as noted by Linh Tran at XS.com. A stronger-than-expected report could push yields higher and weigh on equities, while moderate wage growth alongside expected job figures could allow the S&P 500 to retest its record high.
The market's expectation for a September rate hike by the Fed has decreased to roughly even odds, down from 63% previously, largely due to comments from Fed Governor Christopher Waller. Waller indicated he is inclined to support holding rates steady if inflation data shows continued cooling, contrasting with Fed Chair Kevin Warsh's recent emphasis on fighting inflation. This shift in sentiment led to a rally in Treasuries, particularly at the short end, and a subsequent paring of some declines after strong services sector data showed activity picking up and prices paid jumping to a three-year high.
Investors are now closely monitoring upcoming inflation data, particularly the Consumer Price Index (CPI) report due on September 11, which is considered crucial for determining the Fed's rate trajectory. Goldman Sachs economists, after Waller's remarks, now anticipate the Fed will keep rates unchanged unless CPI and Producer Price Index (PPI) figures come in higher than expected. The benchmark 10-year Treasury yield is currently at 4.75%, moving away from the 5% level that investors view as problematic for equities. While major US stock indexes are on track for a second straight week of gains, concerns about a potential pullback in September, historically the weakest month for US stocks, persist.
