Treasury markets experienced significant weakness on Thursday, extending the declines observed in the prior session. Bond prices faced pressure during the morning and continued to decrease, resulting in a rise in the yield on the benchmark ten-year note, which inversely correlates with bond prices, by 6.5 basis points to 3.850 percent.
This continued softness in treasuries was largely influenced by a report from the Institute for Supply Management, which indicated that U.S. service sector activity reached its highest level in over a year in September. Specifically, the ISM services PMI surged to 54.9 in September from 51.5 in August, surpassing economist expectations of a modest increase to 51.7. A reading above 50 signifies expansion, and this marked the index's highest point since it recorded 55.0 in February 2023.
The data reflects sustained economic resilience, dampening hopes that the Federal Reserve will maintain a rapid pace of interest rate cuts in the near future. The report also highlighted that the prices index increased to 59.4 in September, up from 57.3 in August, signaling an accelerated rate of price growth.
Meanwhile, market participants are also anticipating Friday’s monthly employment report from the Labor Department, considered a pivotal indicator. Current forecasts suggest that employment rose by 140,000 jobs in September, following an increase of 142,000 jobs in August, with the unemployment rate projected to remain steady at 4.2 percent.
The employment data could significantly influence the U.S. economic outlook and anticipations regarding the aggressiveness of future Federal Reserve interest rate reductions. In light of the upcoming release, CME Group's FedWatch Tool currently indicates a 65.4 percent probability of a quarter-point rate cut by the Fed, with a 34.6 percent likelihood of a half-point cut.
Ahead of the key employment data, the Labor Department reported an increase in first-time claims for U.S. unemployment benefits for the week ending September 28th. Initial jobless claims rose to 225,000, a jump of 6,000 from the previous week’s revised figure of 219,000. Economists had anticipated claims to rise slightly to 220,000 from the initially reported 218,000 for the prior week. This unexpected increase followed a week where claims had dropped to their lowest point since May 18th, when they reached 216,000.
Friday’s trading activity is likely to be heavily influenced by the response to the Labor Department's employment report and its implications for economic and interest rate forecasts.
