Bond Market Signals No Need for Rate Hike as ADP Jobs Report Disappoints

Minneapolis Federal Reserve President Neel Kashkari has become increasingly hawkish on interest rates, arguing that now is the time to 'start slowly moving up' as more data comes in. However, a recent ADP jobs report showed private companies adding just 44,000 positions in July, well below the expected 75,000.

This softening of hiring momentum and slower pace of job growth since January raises questions about whether Kashkari's confidence is misplaced. The official nonfarm payroll employment report from the Bureau of Labor Statistics is due Friday, with a forecast for around 80,000 jobs, which would be on the weaker side relative to historical averages.

New Fed Chair Kevin Warsh has emphasized responding to 'durable trends rather than monthly noise,' placing greater weight on inflation measures like the Dallas Fed's Trimmed Mean PCE inflation gauge. This philosophy suggests that a single jobs report, strong or weak, is unlikely to dramatically alter his thinking, and he'll pay more attention to the trend in jobs this year.

The bond market has already begun tightening financial conditions through higher long-term borrowing costs, which could reduce the need for another Fed rate hike. Veteran trader Jonathan Rose noted that since late June, the 10-year Treasury yield has been climbing, pushing mortgage rates and corporate borrowing costs higher, but also reducing the likelihood of a near-term interest rate increase.