The market and the Federal Reserve's game is heating up! Will tonight's non-farm payrolls report determine the extent of the interest rate cut?

Bond traders are turning to Friday's labor market report for clues on the US economic situation, as their confidence in the Fed's second significant rate cut this year begins to waver.

After Fed Chairman Powell indicated that the economy is in good shape, US Treasury yields slipped this week, reducing expectations in the money market for a 50 basis point rate cut in November or December. Current pricing shows that the likelihood of a 50 basis point rate cut next month is only 30%, down from 60% a week ago.

This raises the importance of September employment data, which is expected to show growth in employment numbers. Any signs of weakness in the labor market could potentially revive recent rebounds in US Treasuries and increase expectations for significant rate cuts in the future. Policymakers initiated a rate cut cycle last month, unexpectedly cutting rates by 50 basis points.

Jeff Given, Senior Portfolio Manager at Manulife Investment Management, stated that "if September employment data is significantly weak, 'we would be more inclined towards the bond market'." Nevertheless, he believes that a 25 basis point rate cut in November and December is "the most likely scenario," and that "this is what Powell hinted at this week."

The yield on the sensitive two-year US Treasury bond to monetary policy changes remains around 3.70%, up 20 basis points from this year's low of 3.50%. The benchmark 10-year Treasury yield is trading around 3.83%.

This week's economic data indicates that the economy remains stable. Private sector job growth and service sector indices are stronger than expected, and new jobless claims fail to indicate layoffs. Powell also reiterated this week that policymakers are not in a hurry to further cut rates.

According to a Bloomberg survey, economists expect the September non-farm payrolls report to show an increase of 150,000 jobs - exceeding any month in the past three months. The US unemployment rate is expected to remain at 4.2%. The reading of 4.3% in July was the highest level so far this year.

Employment data is crucial as Fed officials have stated that they can focus more on labor market threats once inflation returns to their long-term target of 2%.

Although lower-than-expected job growth data may reignite the possibility of a 50 basis point rate cut in November, complications may arise from the impact of Boeing's strike, as well as strikes by workers on the US East Coast and Gulf Coast ports, and Hurricane Helen. October employment data will be released before the Fed meeting.

"At some point, this game between the market and the Fed will come to a climax," said Jack Manley, Global Market Strategist at JPMorgan Investment Management, in an interview with Bloomberg TV on Thursday. He stated that **expectations for September's job growth numbers will bring the cumulative rate cut expectations for the last two meetings of the year closer to 50 basis points In addition, Michael Hartnett, a strategist at Bank of America, stated that if the U.S. non-farm payroll report released on Friday falls within expectations, risk assets may rebound. The strategist mentioned that if the data shows an addition of 125,000 to 175,000 new jobs in the U.S. last month, this would support the argument for an economic soft landing and keep bond yields within a range, triggering risk trades.

Hartnett stated that the bulls are "in control," with "clear signs" indicating that China's stimulus measures are "taking effect," and the Fed will further ease policies. The strategist added that if non-farm payrolls exceed 225,000, with an unemployment rate below 4.1%, this would push the U.S. 30-year Treasury yield above 4.5%. If it falls below 75,000, with an unemployment rate above 4.3%, it would mean a "recession."