Rate Cut Expectations Rise Again, $30 Trillion US Bond Market to Face "Data Week" Test

After experiencing a mild increase for a week, the $30 trillion US Treasury market is facing a series of key macroeconomic data tests, which could provide investors with further basis to bet on the Federal Reserve cutting interest rates in the coming months. Due to signs of weakness in the labor market, US bond yields overall decreased this week, with short to medium-term Treasury yields leading the decline, prompting traders to bring forward their expectations of the first rate cut to June or July. However, with a strong rebound in the US stock market on Friday, US Treasury yields slightly rose that day. Looking ahead to next week, the market will see a number of heavyweight data releases, including retail sales, the delayed January US employment report, and the latest inflation data. These indicators directly correspond to the Fed's dual policy goals of "stable inflation and full employment." Additionally, the US Treasury Department will begin issuing a total of $125 billion in bonds through a series of auctions starting on Tuesday, adding more variables to market liquidity and yield trends. George Catrambone, Head of Fixed Income at DWS Americas, pointed out that the delayed release of employment data has tightened market risks like a spring. He stated that the delay of information that was supposed to be digested this week concentrated into next week has actually increased the likelihood of market volatility. Catrambone believes that the biggest hidden risk currently lies in the labor market, implying that the Fed may need to more quickly guide policy rates to a long-term neutral level, around 3% or slightly lower. Investors will focus on the absolute level of employment growth as well as the annual revision magnitude. According to a survey, economists expect around a 70,000 increase in employment in January, compared to 50,000 in the previous month. The unemployment rate is expected to remain at 4.4%, close to the cyclical high of 4.5% reached in November last year. This data will be released by the US Bureau of Labor Statistics. Brian Quigley, Senior Portfolio Manager at Vanguard, stated that the most recent employment indicator that truly moves the market was the slight decrease in the unemployment rate, which the Fed views as a signal of labor market stability. "The unemployment rate may be the most critical number right now. If it remains stable, the Fed will continue to stand pat; if it rises above 4.5%, then expectations of a rate cut will reignite." Interest rate futures market data shows that traders currently price in only a 16% probability of a 25 basis point rate cut in March. The Fed kept the policy rate range at 3.5% to 3.75% in the January meeting, after cutting a total of 75 basis points from September last year to the recent three meetings. Meanwhile, the market has factored in a loosening of about 23 basis points in the June meeting. If Jerome Powell's nomination as Fed Chair is approved by the Senate, it will be the first interest rate meeting he presides over after taking office. Traders expect at least two 25 basis point rate cuts in the second half of this year, a expectation significantly higher than the Fed's own official forecast of only one possible rate cut this year.