Markets Eye Labor Data Revisions

INTEREST RATE MARKET FUTURES

Futures are lower across the curve as markets prepare for revisions to US labor data and a $58 billion Treasury auction in three-year notes later Tuesday. The Bureau of Labor Statistics revisions to earlier months’ jobs data will likely be more closely watched than usual following the weak payrolls data on Friday that cemented expectations for a rate cut in September and has fueled speculation for a series of rate cuts. Markets anticipate a downward revision of as much as 800,000 jobs, which could add to further speculation that the Fed will make a series of interest rate cuts after its September meeting. However, PPI inflation data out Wednesday and CPI inflation data out Thursday could temper some rate bets if inflationary figures come in hot. Recent PPI data has shown that pipeline inflationary pressures have been building due to tariffs, with July’s reading showing producer prices grew 0.9% in July, while services prices rose by 1.1%. The uptick in inflation has worried economists that inflation could continue to grow into the fall, although it remains to be seen whether or not tariff-induced price inflation will be more of a one-time increase or a consistent increase in prices. Despite the inflation fears, markets continue to price in multiple cuts over the coming months, which could leave the yield curve vulnerable to hotter inflation data.

The US Treasury market is experiencing a unique supply/demand dynamic shift. Recent government debt auctions have shown a changing profile of who is purchasing government bonds, with demand from traditional investors like central banks and pension funds waning and unlikely to come back. Instead, short-term investors such as money market funds have picked up supply. The new mix of investors is likely to lead to a more volatile market for longer-dated debt, as short-term investors will be more price sensitive than traditional investors, like pension funds, who tended to hold onto their bond investments. Demand from pension funds has dwindled in recent years due to funds switching from defined-benefit schemes, which provide a guaranteed income at retirement, to defined-contribution schemes, which depend on investment performance. Defined-benefit schemes use government bonds, while defined-contribution schemes favor equities. These developments also come at a time when central banks are selling their holdings of government debt (quantitative easing), and governments are increasing spending, driving up bond issuance. This has resulted in investors demanding more term premium on longer-dated debt, while shorter-term debt has remained closer to current interest rate levels, steepening the yield curve. In response, governments have increased short-term debt issuance in order to avoid steeper borrowing costs, which has the potential to reduce liquidity in longer-dated bonds and make them more volatile. The Treasury will auction $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday. Markets will be eyeing the composition of the auction share for further clues on investor demand.

The spread between the two- and 10-year yields fell to 53.8 bps from 57.3 bps on Monday.

CURRENCY FUTURES

The USD index is little changed as markets prepare for revisions to US payroll data covering the period from April 2024 to March 2025. Economists anticipate a downward revision of as much as 800,000 jobs, which could add to speculation that the Fed will make a series of interest rate cuts this year. However, a better-than-expected reading could temper those expectations, especially ahead of inflation data due later this week. Investors look ahead to PPI inflation and CPI inflation data due Wednesday and Thursday respectively for further clues to the near-term rate outlook; if inflation proves to be mild, markets could increase speculation about the amount of easing from the Fed and see the dollar lose further ground.

Euro futures are lower after French Prime Minister François Bayrou was ousted in a parliamentary confidence vote over its plans to tame the ballooning national debt budget, a result that markets had widely anticipated. On the central bank front, the European Central Bank is expected to leave interest rates on hold this month and offer little guidance for clues on future moves out of the bank. ECB policymakers have recently said the bank is in a good place and well positioned for any economy moves after it achieved its target of reaching 2% inflation earlier in the summer. Eurozone GDP grew just 0.1% in Q2, slowing from 0.6% in Q1, largely due to a 0.3% contraction in Germany amid US tariffs. The data, alongside rising inflation and falling unemployment, supports expectations that the ECB will hold rates steady. On the data front, French industrial output fell 1.1% lower in July, offsetting some of the 3.7% rise in June. Production fell back in electrical equipment and pharmaceuticals, sectors particularly exposed to the uncertainty surrounding US tariffs. The data was better-than-expected, and comes on the heels of German industrial production figures, which grew in July despite a drop in exports to the US. Industrial production grew 1.3% on the month, the first rise since March, while June’s data was revised upward to a decline of just 0.1% from the 1.9% slump originally reported.

British pound futures are little changed as markets prepare for revisions to US labor data, which could further build the case fort a series on interest rate cuts from the Fed. Gross domestic product data out of the UK for the month of July remains the main focus of the week ahead of the Bank of England’s policy meeting next week. A solid GDP reading would add to expectations that the central bank will leave rates on hold, while a weak reading could add to some bets of a rate cut. Money markets are showing a slim chance of even one rate cut out of the bank this year, given inflation in the UK remains well above the bank’s 2% target and the economy has fared relatively well without any signs of a serious weakening. Governor Andrew Bailey told MPs there is “considerably more doubt” about the timing of UK rate cuts. The economy expanded 0.4% in June, and economists are expecting Friday’s figures to show no growth with a reading of 0.0%. Markets will also be watching industrial production and trade data for July, also released on Friday.

Japanese yen futures are higher. With no new data out markets will monitor political developments out of Tokyo after Prime Minister Shigeru Ishiba resigned on Sunday. Ishiba instructed his party to hold an emergency leadership race, saying he would also continue his duties until a successor is elected. Concern over the uncertainty prompted a sell-off in the yen and its government bonds. Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy. On the data front, revised government data showed that GDP grew more than initially measured in the second quarter, with the economy growing 0.5%, a step above the initial 0.3% reading. Private consumption increased 0.4% from the previous quarter, compared with a 0.2% rise in the preliminary reading, while capital expenditure growth was revised to 0.6%, compared with the initial estimate of 1.3%. Markets will continue to monitor the Japanese economy for signs of growth in domestic demand for clues as to when the Bank of Japan will resume its interest rate hike cycle again. The Ministry of Finance is scheduled to auction 2.4 trillion yen worth of five-year Japanese government bonds on Wednesday, as well as sell six-month Treasury discount bills on Tuesday and three-month bills on Friday.

Australian dollar futures are higher after a release of mixed local economic data. A survey of Australian businesses showed conditions improved in August, with profits and employment bouncing. Meanwhile, a survey of consumers showed confidence falling back from 3 ½ year highs amid worries about the economic outlook. Interest rate cut bets for the Reserve Bank of Australia were scaled back last week when GDP figures showed the economy grew 0.6% during the second quarter. Annual growth came in at 1.8%, beating expectations of 1.6% growth. Domestic demand was the main driver of growth, led by household and government spending. Household spending grew 0.9% in Q2. The increase in household spending could put pressure on prices and limit the number of future rate cuts from the RBA. Money markets are now pricing an 80% chance of a rate cut in November, down from 100% before the data was published. Building approvals in the country shrank 8.2% in July, coming in line with expectations, while private house approvals grew 1.1%.

STOCK INDEX FUTURES

Stock index futures tread water to kick off the day as markets await revisions to jobs numbers, which are expected to show further weakness in the labor market. The revisions are gaining more attention than usual due to the weak labor data out recently and its potential implications for the Fed and the amount of easing the economy could see this year, and potentially the size of the rate cut in September. On the tech front,  Apple’s annual fall event is here and the tech giant is expected to showcase several new devices including the iPhone 17 and iPhone Air. Experts question whether the smartphone updates can generate enough consumer interest to drive up sales, especially following a tariff-fueled buying frenzy earlier this year.

The economic calendar will remain light for the rest of the week, giving Wednesday’s PPI data and Thursday’s CPI inflation data a large spotlight. Higher figures here could temper some bets on the amount of easing from the Fed this year. Although, a hot reading will likely have little impact of the prospects of a September rate cut given the labor market. Slowing price growth could add to expectations for a series of interest rate cuts from the Fed if inflation proves to be a lesser problem than initially feared.

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