Yields rise before Friday's jobs report
Updated at 1500 EDT
By Karen Brettell
NEW YORK, Oct 31 (Reuters) -U.S. Treasury yields rose on Thursday and two-year yields hit a three-month high before Friday's highly anticipated jobs report for October, after data on Thursday showed falling wage inflation and strong consumer spending.
Friday's data could create a large market reaction and potentially make some Federal Reserve interest rate cuts less likely if it comes in much stronger than expected. Employers are expected to have added 113,000 jobs during the month, according to economists polled by Reuters. USNFAR=ECI
“If tomorrow we get an upside surprise it could make markets question whether the Fed needs to cut in their upcoming meetings, and it could certainly put something like a December rate cut into question,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
A softer number, meanwhile, may be dismissed as effects from recent hurricanes that impacted areas including Florida and North Carolina. The data is also expected to be negatively impacted by strikes in the aerospace manufacturing industry and at three hotel chains.
Traders are pricing in 93% odds of a 25 basis point cut at the Fed's Nov. 6-7 meeting, but only a 74% probability of a 25 basis point reduction at both its November and December meetings, according to the CME Group's FedWatch Tool.
Data on Thursday showed U.S. labor costs recorded their smallest increase in more than three years in the third quarter amid cooling wage growth, indicating inflation was firmly on a downward trend. The personal consumption expenditures (PCE) price index rose 0.2% after an unrevised 0.1% gain in August.
U.S. consumer spending also increased slightly more than expected in September, putting it and the economy on a higher growth trajectory heading into the final three months of the year.
The number of Americans filing new applications for unemployment, meanwhile, fell last week as distortions from recent hurricanes faded.
“The net takeaway from this is there's really not much here to prevent the Fed from cutting," said Goldberg. “But at the end of the day, it also suggests the Fed doesn't necessarily need to rush into rate cuts."
Benchmark 10-year yields US10YT=RR were last up 1.8 basis points at 4.282%. They reached a nearly four-month high of 4.339% on Tuesday.
Two-year yields US2YT=RR rose 1 basis point to 4.166%, and reached as high as 4.218%, the highest since Aug. 1.
The yield curve US2US10=TWEB between two-year and 10-year notes was little changed on the day at 12 bps.
Some investors have been hesitant to take large positions in U.S. government bonds before the Nov. 5 U.S. elections.
Opinion polls show a roughly even chance of a victory by Republican former President Donald Trump or Democrat Vice President Kamala Harris, though betting sites are placing greater odds on Trump winning the U.S. presidency.
U.S. yields were also pulled higher by a rise in British government debt yields a day after finance minister Rachel Reeves' delivered her budget to parliament.
“The latest selloff in the U.S. rates market is likely a spillover from the U.K.’s plans for more borrowing and fiscal stimulus over the coming years, which is thought to be inflationary,” Lawrence Gillum, chief fixed income strategist for LPL Financial, said in an emailed comment.
Employment cost index and JOLTS job openings https://reut.rs/4f5Gf4i
Reporting by Karen Brettell; Editing by David Holmes and Daniel Wallis
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