October 2, 2019 / 3:24 PM / 18 days ago

TREASURIES-Yields fall as weak data bolsters forecasts of October rate cut

NEW YORK, Oct 2 (Reuters) - Weak U.S. private sector jobs data and a jump in expectations that the Federal Reserve will cut interest rates in October drove two-year Treasury yields to a one-month low on Wednesday.

The ADP National Employment Report showed hiring by U.S. private employers slowed in September, adding to the growing evidence this week that the economy is weakening.

Expectations the Fed will cut rates by 25 basis points from its current target rate of 1.75%-2.0% in October leapt to 74.3% on Wednesday from 39.6% on Monday, according to CME Group’s FedWatch tool.

The two-year Treasury yield, which is a proxy for investor expectations of interest rate moves, was 5.6 basis points lower in morning trade at 1.498%, extending a 6.6 basis point fall a day earlier when the United States reported the weakest manufacturing data in more than a decade.

“Yesterday’s move was the one that may have changed hearts and minds about the chances of a recession in the next 12 months,” wrote Kevin Giddis, chief fixed income strategist at Raymond James.

The longest U.S. economic expansion on record, now in its 11th year, is losing ground with the blame largely put on the 15-month trade war between the United States and China, which has eroded business confidence and pressured manufacturing.

The ADP figures, which suggested trade tension could be spilling over to the labor market, came ahead of the Labor Department’s more comprehensive nonfarm payrolls report due on Friday, which includes public- and private-sector employment.

Slowing job growth is a concern as it could curb consumer spending, which has been the economy’s growth engine.

While the ADP report has a poor record of predicting the private payrolls component of the government’s employment report, last month’s slowdown in hiring fits in with economists’ expectations for moderate nonfarm payrolls growth in September.

“The ADP employment change for September came pretty much on the screws at 135,000, but the August revision didn’t help,” wrote Giddis.

“The August number was revised downward by 38,000 to 157,000 versus an earlier reported number of 195,000. This is why I believe that Friday’s nonfarm payrolls will come in weaker than the forecast.”

The benchmark 10-year note yield was last 4 basis points lower at 1.604%, with the 30-year bond yield down 3.1 basis points at 2.074%. (Reporting by Kate Duguid; editing by David Clarke)

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