Fed to Stand Pat as Attention Shifts to NFP

The Fed is set to keep rates on hold for another month, while US jobs numbers are expected to come back to normal after last month's surprise.

A Quiet Meeting For Once?

The overwhelming majority of traders are expecting no change in the interest rate following the FOMC meeting, which concludes today. This isn't a surprise since Fed Chair Jerome Powell essentially said there would be no rate hike at this meeting when he spoke before the Economic Club of New York a couple of weeks ago. That's a venue where the head of the Federal Reserve often provides a heads-up to the markets.

But that doesn't mean it's smooth sailing for the markets since a hike in December is still up in the air, especially after the US blew past expectations with its Q3 GDP growth figures. The rate decision statement and the subsequent press conference might be the venue to provide strong hints if the Fed will actually go through with a final rate hike this year. If that were to happen, it could considerably upset the markets since nearly 80% of traders expect no further rate hikes.

But, even if the Fed doesn't take action, bond yields could continue to drift higher as the group keeps up its quantitative tightening and the Treasury brings more debt to market.

NEW MARKETS: US Ultra T-Bond and US 2-Year Note

When the Federal Reserve signals a pause or stops hiking interest rates, there are typical reactions across the yield curve for U.S. Treasuries. However, the exact reaction can vary based on various factors, including the broader economic context, investor expectations, and global events. Generally speaking:

1. US Ultra T-Bond (Long-Term Treasury Bonds)

When the Federal Reserve stops hiking rates, it often signals concerns about economic growth or other headwinds. In such a scenario, long-term Treasury bonds, such as the U.S. Ultra T-Bond, tend to see increased demand as investors seek safe-haven assets. This increased demand generally drives up bond prices and pushes down long-term yields.

FYI: The "Ultra" in its name indicates that this particular futures contract is based on the longest maturity of all Treasury bond products. It typically represents bonds with remaining terms to maturity of approximately 25 years or more.

2. US 2 Year Note (Shorter Duration Treasury Bonds)

For shorter-duration bonds, the reaction might be more direct. If the Fed stops hiking rates, short-term yields might stabilize or even decline as the expectation of future rate hikes diminishes. The prices of short-term bonds would, in turn, rise.

The yield curve, which plots the yields of bonds of various maturities, can also flatten or steepen based on these reactions. If long-term rates fall more than short-term rates in response to the Fed's actions, the yield curve might steepen. Conversely, if short-term rates fall more than long-term rates or if they both fall similarly, the yield curve might flatten.

NFP To Come Down to Earth

Last month saw non-farm payrolls exceeding all expectations, nearly doubling the consensus. But economists haven't upgraded their outlook for this time, forecasting just 190K new jobs compared to 336.0K reported previously. It would also be an opportunity for last month's figure to be revised lower, which is typical of data releases this year. The unemployment rate is expected to remain unchanged at 3.8%.

Coming so close on the heels of the FOMC meeting, the October NFP might not have as big of an impact on the markets. But, that could depend on the emphasis put by the Fed's statements, given that core inflation has been coming down, but not as fast as expected. If the Fed blames the strong jobs market and leaves the door open for a hike in December, then the NFP could substantially shake things up if it once again beats expectations. The monthly average hourly earnings are expected to accelerate to 0.3% compared to 0.2%.

2-Year Note Reveals Short-Term Flag

The US 2-Year Note could surge if the short-term flag pattern holds, breaking past 101.35 and off to 45 next. If the lower end gives in, we might revisit the swing low at 101.1 before getting more clarity. However, sliding outside the upward channel will increase the chances of further declines, potentially exposing 101 and beyond.

Source: SpreadEx / US 2 Year Note

Key Takeaways

The Fed is expected to keep interest rates unchanged, in line with previous indications by Fed Chair Jerome Powell. However, the possibility of a rate hike in December remains uncertain, especially after strong Q3 GDP growth figures.

The market will closely watch the rate decision statement and press conference for hints about future rate hikes. Additionally, the October NFP report is expected to show a more modest job growth than the previous month, and if it exceeds expectations, it could impact the markets.