Bond Traders Stick to Rate-Cut Bets as Tariffs Outweigh Jobs

(Bloomberg) -- A report showing healthy U.S. job gains failed to deter bond traders from betting on a half-point of additional Federal Reserve rate cuts in 2019 as escalating U.S.-China trade tensions held the market's focus.

Fed funds futures showed that traders see about 51 basis points of easing by year-end, on top of the rate cut announced Wednesday. That's right around where expectations stood before Friday's release of labor-market data for July, which showed job additions in line with expectations.

The benchmark 10-year Treasury maintained gains, with yields near the lowest level since 2016, even after CNBC reported that President Donald Trump is willing to shelve tariffs if China takes positive action. The bond market surged Thursday after the president tweeted that he planned to impose additional tariffs on China.

“The focus is not on the jobs picture, because it's been the shining star of the U.S. economy,” Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said in a Bloomberg Television interview after the release. “Markets are back to focusing on all the other risks, which are tariffs, Brexit, and a whole bunch of global geopolitical risks.”

Ten-year Treasury yields traded near 1.88% in the aftermath of the labor report, after dropping just below 1.83% Friday. The Bloomberg dollar was steady near its highest level of 2019, though haven currencies such as the yen were in favor as risk appetite remained fragile.

Markets this week have increased the amount of easing priced in for this year following Trump's surprise tariff-hike announcement, and as China threatened to retaliate. Futures indicate about a quarter-point of easing priced in for the Fed's next meeting, in September.

Friday's payrolls print “confirms my belief that the U.S. is in good shape,” wrote Win Thin, head of currency strategy at Brown Brothers Harriman & Co., in a report. “Absent tariffs, there would be no need to cut in September.”

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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