The hot non-farm data suppresses the Fed's rate cut expectations, bringing the "global asset pricing anchor" back to 4%

According to the Wisdom Financial APP, on Monday, the prices of various maturity US Treasury bonds all plummeted, exacerbating the collapse of the US bond market triggered by strong labor market data, leading to a significant upward shift in the US bond yield curve (US bond yield changes inversely with price changes). The latest incredibly strong US non-farm payroll data, as well as the unexpected drop in the unemployment rate, caused traders to significantly reduce their bets on the Fed's continued 50 basis point rate cut.

As most bond traders globally temporarily abandon their bullish bets on US Treasuries, the 10-year US Treasury yield, known as the "global asset pricing anchor," has risen to its highest level since August, breaking through the key 4% level. Since August 1st, the pricing in the interest rate futures market for the first time implies that the Fed's benchmark rate cut by the end of the year will be less than 50 basis points, indicating that some traders are even pricing in the possibility that the Fed may choose not to cut rates at the November or December FOMC meetings.

From a theoretical perspective, the 10-year US Treasury yield is equivalent to the risk-free rate indicator r in the important valuation model in the stock market - the DCF valuation model's denominator. When other indicators (especially the numerator's cash flow expectations) have not changed significantly, and even in the case where cash flow expectations may trend downward during the October US earnings season, if the denominator level is higher or continues to operate at historically high levels, the valuation of risky assets such as US technology stocks, high-risk corporate bonds, and cryptocurrencies faces a contraction.

Traders now believe that there is an 85% chance that the Fed will switch to a 25 basis point rate cut in November. In contrast, the probability of the bond market betting on a 25 basis point rate cut after the non-farm payroll report was released barely exceeds 50%, while the probability of betting on a 50 basis point rate cut once exceeded that of a 25 basis point cut.

Jamie Lewin, an interest rate market strategist at TD Securities, said, "The market's focus is even shifting to whether there will be further rate cuts." "From an economic perspective, the situation is not that bad, which has led the market to reprice the Fed's rate cut path." TD Bank continues to expect the Fed to choose a 25 basis point rate cut in November, rather than persisting with a 50 basis point cut.

Traders are withdrawing their bets on the Fed's significant rate hike path - the sharp rebound in non-farm payroll data has forced traders to readjust their rate cut bets.

As of the trading session on Monday, the 10-year US Treasury yield rose by 6 basis points to 4.03%, while the more rate-sensitive 2-year US Treasury yield rose by 10 basis points to 4.02%. Short-term US Treasury bonds with maturities of 2 years and below performed poorly, indicating a temporary reversal of a key part of the US bond yield curve trend, highlighting a significant cooling of market expectations for the Fed's future rate cut path From a historical perspective, the yield curve of US Treasuries usually slopes upwards, with higher yields on longer-term bonds. However, this norm was interrupted in the past two years due to the Federal Reserve's initiation of an aggressive rate-cutting cycle.

These latest betting moves can be seen as reflecting the bond market's expectation of the Federal Reserve leading a scenario of "no landing" for the US economy - that is, continued growth in US employment and the overall economy, a resurgence in inflation rates, and a situation where the Federal Reserve has almost no room for further rate cuts. The extremely hot non-farm payroll report released on Friday once again sparked concerns about the US economy overheating, disrupting the five-month upward trend of US Treasury bonds.

According to data released by the US government on Friday, following the unexpected upward revisions of 72,000 non-farm payroll jobs in the previous two months, non-farm payrolls in September saw a significant increase of 254,000 jobs, marking the largest increase in non-farm payrolls in six months. In contrast, economists' median expectation was only 150,000 jobs, and the latest non-farm payroll figure exceeded even the most optimistic expectations from media surveys. According to another data released by the US Bureau of Labor Statistics on Friday, the unemployment rate unexpectedly dropped to 4.1%, and average hourly earnings grew by 0.4% month-on-month, both figures surpassing economists' expectations (unemployment rate expected at 4.2% and hourly wage growth at 0.3%).

Combined with other data released last week, it is evident that US companies still have a healthy demand for workers, with very low layoff numbers, and earlier economic data showing the resilience of the US economy. The non-farm payroll report may significantly alleviate economists' concerns about a rapid cooling of the US labor market and fears of an economic recession. The situation in the US labor market is closely related to US consumer spending, as the scale of employment and wage income are crucial for overall consumption. Strong consumer spending will undoubtedly drive the US economic giant ship to continue sailing, as 70%-80% of the components of the US GDP are closely related to consumption.

"We had expected a stronger yield curve, but also anticipated a gradual adjustment process," wrote strategists at Goldman Sachs, including George Cole, in a report. "The strength of the September non-farm payroll report may accelerate this process, reigniting debates on the extent of monetary policy constraints, which in turn may deepen the impact on the US economy and potentially deepen the Fed's rate cut."

Unfilled statistics data on Monday (tracking positions in the futures market) saw a significant drop in several contracts related to the overnight secured financing rate (SOFR), indicating that US bond bulls are surrendering. At the same time, in the more popular options market, a new batch of "Fed hawkish hedge" trades have emerged, betting that the Federal Reserve will only cut rates by 25 basis points this year - implying that there may be one meeting in the next two where rates are not cut According to reports, the economist team at Citigroup, a major Wall Street bank, stated in a report on Monday that they expect the Federal Reserve to cut interest rates by 25 basis points in November, instead of the previously anticipated 50 basis points. Following the release of September non-farm payroll data on Friday, which suggested that the U.S. economy remains strong, Citigroup, along with other Wall Street banks, abandoned the aggressive prediction of a 50 basis point rate cut.

Citigroup economists Veronica Clark and Andrew Hollenhurst wrote in the report, "The threshold for the Fed not cutting rates in November is quite high, as a month of labor market data has not convincingly reduced the downside risks to the economy, which have persisted for several months, and many data sets prompted Fed officials to choose a 50 basis point rate cut in September." "We believe that weakness in the labor market will reappear in the coming months, overall inflation trends will continue to slow, which may prompt Fed officials to choose a 50 basis point rate cut in December."

Traders are now eagerly awaiting a series of speeches by several Fed officials this week to further understand the dynamics of interest rates. They are also awaiting the release of U.S. inflation data later this week, with economists generally expecting a 0.1% increase in the U.S. Consumer Price Index (CPI) for September, potentially marking the smallest increase in three months. Fed Chair Jerome Powell recently emphasized that the Fed officials' dot plot forecasts, combined with their policy rate decision in September, indicate that the Fed will choose to cut rates by 25 basis points at the last two FOMC meetings this year, totaling a 50 basis point rate cut.

Dario Perkins, managing director at TS Lombard, said, "The Fed does not need an economic recession to achieve an acceptable level of inflation, so the Fed has relaxed its monetary policy without waiting for a real economic slowdown." "So far, everyone should realize that the Fed is proactively choosing preemptive rate cuts and will not stop immediately."

"In our view, the possibility of a 50 basis point rate cut at the November Fed FOMC meeting no longer exists. The U.S. bond market is still adapting to the new pricing reality," said Bloomberg strategists' economist team.

In September, the Fed initiated its first rate cut cycle in four years, cutting rates by 50 basis points more than expected. Fed Chair Jerome Powell stated that this move aims to protect the resilience of the U.S. economy, with the purpose of "preemptive" rate hikes rather than recession motives. Recently, Powell has repeatedly emphasized that Fed officials are not seeking or welcoming further cooling of labor market conditions. Powell and other Fed officials have hinted through various wordings that the Fed's main task in the future is to avoid an economic recession and ensure a "soft landing" for the U.S. economy