AI selloff meets the nonfarm payrolls test, safe-haven funds rush into the bond market! Will an unexpected strengthening in employment disrupt bullish positioning in US Treasuries?

Title context: AI selloff meets the nonfarm payrolls test, safe-haven funds rush into the bond market! Will an unexpected strengthening in employment disrupt bullish positioning in US Treasuries? Text: As global technology stocks plunge, US Treasury market traders are positioning earlybetting that continued weakness in nonfarm payrolls, cooling AI investment expectations, falling oil prices, and safe-haven inflows will together compress the room for further Federal Reserve rate hikes. Judging from the latest moves in the US Treasury market, Treasuries are pricing in "narrowing room for further rate hikes." These seasoned fixed-income traders are betting that potentially soft nonfarm payrolls data, easing inflation pressure from falling oil prices, and safe-haven demand triggered by the stock market rout will jointly push bond prices higher and lower the US Treasury yield curve across maturities. The October US nonfarm payrolls report, scheduled for release at 21:30 Beijing time on November 6, thus becomes a key test for this round of stock-and-bond repricing. The median estimate in a Bloomberg survey shows economists expect 65,000 new jobs, with the unemployment rate holding at 4.2%; as of press time, the 10-year US Treasury yield has fallen to about 4.82%, and interest rate swaps price a December rate hike at about 68%. The market is scaling back the magnitude of further tightening, but a rate hike remains the more likely scenario for the December FOMC meeting. The change bond investors should pay more attention to is that some institutions plan to use price pullbacks triggered by strong employment data to add to US Treasury assets amid rising market risk aversion and elevated yields. AI selloff meets nonfarm payrolls, Treasuries trade ahead of narrowing rate-hike room The market environment facing this US nonfarm payrolls report has evolved from post-election sector divergence into broad risk contraction. As of Thursday's US stock market close, the Nasdaq 100 Index, known as the "global tech stock bellwether," fell 6.36%, the largest single-day drop since March 2020; the S&P 500 fell 4.36%, and the Philadelphia Semiconductor Index plunged 12.25%. On Friday the selloff continued to transmit to Asia: South Korea's KOSPI fell below 5,000 points intraday and triggered a circuit breaker, eventually closing down 6.02% at 5,059.69; Japan's Nikkei 225 closed down 5.96%. Concerns that US data center construction may slow are transmitting to Asia's export chain through chip orders, equipment procurement, and capital expenditure expectations. Against this backdrop, technology stocks face both earnings expectation adjustments and valuation pressure from investors demanding higher risk compensation. Wall Street is fairly unanimous on the direction of a rebound in US corporate hiring, but clearly divided on the strength of nonfarm payroll growth. Goldman Sachs, Bank of America, and JPMorgan all expect 75,000 new jobs; Citi, UBS, and Wells Fargo expect 65,000; Morgan Stanley expects 60,000, Deutsche Bank expects 55,000, Barclays expects 50,000, and TD Securities expects 40,000. Mitsubishi UFJ Financial Group's forecast is higher at 90,000, mainly based on increased job openings in some industries and favorable seasonal factors. These major bank forecasts also mean that a result slightly above 65,000 is already within the expectations of several major banks. What truly determines the strength of the rate shock is whether new jobs, the unemployment rate, wages, and prior-month revisions together point to a re-acceleration in demand. The market expects average hourly earnings to rise 0.3% month-on-month and annual growth to slow to 2.9%; if hiring recovers while wage pressure continues to ease, corporate revenue and profits may still be supported while reducing the need for additional tightening. The latest productivity data also offers this possibility: third-quarter nonfarm business sector labor productivity rose 3.6% at a seasonally adjusted annualized rate, while unit labor costs fell 0.7% on the same basis, indicating that output expansion does not necessarily push up unit labor costs in tandem. Revisions are equally important: August's new jobs were revised down from 162,000 to 133,000, and the 29,000 nonfarm payrolls figure was the September initial reading and may face further adjustment on Friday. US Treasury traders build bullish positions ahead of the jobs report As expectations for further Federal Reserve rate hikes continue to weaken, bond traders are positioning ahead of Friday's October employment report, betting on further gains in the US Treasury market. The global stock market selloff after the US midterm elections prompted investors to turn to US Treasuries for safe haven this week, pushing Treasury yields on Thursday to their lowest levels since early September. On Friday, as the stock market decline intensified, the 10-year US Treasury yield stood at 4.82%. The recent rally has strengthened traders' confidence, and they are targeting opportunities for further yield declines in the coming days. In the options market, one trade bets that the 10-year yield could fall to 4.7% by the end of next week, while another trade expiring November 20 targets a scenario in which the yield falls to about 4.35%. Although October employment data is expected to improve from September, even if the data come in stronger than expected, the US Treasury rally could continue as long as investors are prepared to buy on the selloff. Jamie Patton, co-head of global rates at TCW Group, said that if the data are strong, "we would be more likely to add to purchases than to sell." As the chart above shows, as the US Treasury market leans toward scaling back Fed rate-hike expectations, US two-year Treasury prices riserising Treasury prices mean falling yields. Patton's view aligns with the findings of a survey by BMO Capital Markets strategists. Strategists led by Will Hartman said in a report that although investors are "cautiously inclined to believe yields will move higher," they are "prepared to add duration when US Treasuries sell off after the nonfarm payrolls report." BMO surveys investors monthly on how they intend to respond to Treasury yield changes triggered by employment data; the latest survey found that 48% of respondents would buy on price declines, above the six-month average of 43% and the highest share in four months. The US war with Iran pushed oil prices sharply higher, keeping inflation elevated, while the AI investment boom boosted US stocks. Against this backdrop, the Federal Reserve implemented its first rate hike since 2023 in September. However, expectations for further hikes have gradually weakened since then, especially after the Fed left rates unchanged in October. The Fed said at the time that economic conditions allowed it to wait for more data to guide its next policy decision on December 9. Interest rate swaps currently reflect about a 68% probability of a December rate hike; for the policy path through mid-2027, the market has not fully priced in two 25-basis-point hikes. As recently as last month, these contracts had fully priced in three hikes by then. Gennadiy Goldberg, head of US rates strategy at TD Securities, said: "We expect Friday's data to be slightly soft, but for the market, fundamentals remain crucial. The economy we see is still quite strong, and the labor market is in a 'low hiring, low firing' state, so over the past few weeks, the market has already scaled back a considerable portion of rate-hike expectations." By the time Fed policymakers meet in December, they will also have seen the November employment data scheduled for release on December 4. They will also have the inflation indicators due later this monththe October consumer price index on November 10 and the personal consumption expenditures price index, or PCE price measure, from the October personal income and outlays data on November 25. This week crude oil prices fell to two-month lows, partly on expectations that the election outcome could prompt a faster end to the Iran war. This drove market-implied inflation expectations sharply lower. The breakeven inflation rate on five-year US Treasury Inflation-Protected Securities, or TIPS, fell this week to about 2.27% from 2.5% at the end of last week. This indicator represents the average CPI increase needed for inflation-protected Treasuries to deliver returns comparable to higher-yielding ordinary Treasuries. The October employment report will be released at 8:30 a.m. Washington time on Friday. The median forecast in a Bloomberg survey expects nonfarm payrolls to increase by 65,000. September added 29,000 jobs, below all forecasts in the survey at the time, though that figure will face revision in the October report. Oliver Chambers, head of fixed-income separately managed accounts at Clark Capital Management, said: "Over the past two or three months, it seems there has been a large revision in one direction each time, followed by a revision back the next month. This slowdown needs to return to normal to some extent."