September 6, 2019 / 2:16 PM / a month ago

TREASURIES-Slow jobs growth knocks yields lower, but strong wages cushion blow

(New throughout; adds analyst quotes)

By Kate Duguid

NEW YORK, Sept 6 (Reuters) - U.S. Treasury yields fell on Friday following the Labor Department’s report showing job growth slowed more than expected in August, but losses were cushioned by strong wage gains, which should support consumer spending and keep the economy expanding moderately amid rising threats from trade tensions.

As the market digested the employment data, the benchmark 10-year note’s yield fell 1 basis point to 1.555%, with the two-year yield down 1.4 basis points to trade at 1.528%.

“It was a generally weak report. The U.S. labor market has been the last line of defense amid softening global economic data and we can’t read too much into any single report. But this is one more piece of evidence that the Fed is behind the curve,” said Bill Merz, head of fixed income research at U.S. Bank Wealth Management.

“Wage gains and hours worked were a silver lining, but that hasn’t led to higher inflation or inflation expectations yet, which is what the market really needs to see.”

Still, he said, the market’s focus remains on developments in the U.S. trade war with China and other unstable geopolitical situations such as the ongoing protests in Hong Kong and Britain’s exit from the European Union.

“This report has taken a backseat to a lot of other things that are transpiring in the market. It is good enough to not be disruptive to markets today.”

The economy’s waning fortunes, underscored by an inversion of the U.S. Treasury yield curve, have been largely blamed on the White House’s year-long trade war with China. Washington and Beijing slapped fresh tariffs on each other’s exports on Sunday. While the two economic giants on Thursday agreed to hold high-level talks in early October in Washington, the uncertainty, which has eroded business confidence, lingers.

The jobs report is unlikely to change what the Fed does at its next monetary policy meeting. “The labor market continues to be the strongest point of data across the economic landscape, and that’s not what has been the catalyst for the Fed shifting to an easing bias,” added Merz. “This report doesn’t have as strong of an impact on the forward path of monetary policy as the payrolls report has had in the past because the consumer is relatively healthy and the jobs market is relatively strong.”

Federal Reserve Chair Jerome Powell is speaking later on Friday in Zurich about the current economic outlook. The Federal Open Market Committee is to meet on Sept. 17-18 and is widely expected to lower interest rates by 25 basis points, in what would be its second cut this year.

Reporting by Kate Duguid; Editing by Dan Grebler

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