Sharp drop in Payrolls makes life easier for the Fed, as UK bonds recover

The payrolls report for October was a non-event. The 12,000 reading was much lower than expected, however, the numbers were heavily distorted by weather and strikes. The bureau for Labor Statistics in the US, said that the survey collection rate for October was well below average, thus expect big revisions down the line. The unemployment rate remained steady last month at 4.1%, and average hourly earnings also expanded at a 4% annual rate for October.

It is likely that the Fed will look through these employment numbers, and instead November numbers will be worth watching to see the trend in the US labor market and any revisions to the October data. There has been a small recalibration in the Fed Fund Futures market, the implied interest rate for December 2024 is down 2bps on Friday to 4.37%, likewise, the rate for June 2025 has fallen back 5 bps to 3.77%.

Weak US Payrolls boosts global bond markets

The biggest reaction to the US payrolls report is in the bond market. After selling off sharply for most of this week, global bonds are rallying at the end of this week, and yields are falling sharply. The weaker than expected payrolls report has helped to mollify UK bond investors, and the 2-year yield has reversed course and is now down 4.5bps, the 10-year yield is lower by 4 bps. Expectations for UK interest rate cuts have also been boosted by the decline in bond yields, the implied rate for September 2025 is 4.03%, this had been 4.06% on Thursday. It is only a mild move, but it does highlight how the US is the centre of the financial world, and the Fed is the central banker to the world. If the Fed talks dovish next week, then this could help UK yields to recover further.

Why UK bonds are in recovery mode: Can the UK economy beat the forecasts?

There is no domestic reason UK bond markets are in recovery mode on Friday afternoon. Maybe bond traders felt that they had given the UK government enough of a shock to force them to spend money they borrow in only the most productive projects? Maybe there is growing hope that the UK economy will grow at a faster pace than the OBR’s forecasts, after all, it has consistently outperformed most institutional forecasts in recent years? The market may have also considered the prospect of the public sector crowding out the private sector, something the OBR warned about this week, as being wide of the mark. The Chancellor has spoken about pairing with the private sector to deliver some of its investment plans. Thus, while we don’t think that the bond market will welcome the Budget with open arms, they may take a more balanced view of its effects in the coming days and weeks.

Market reacts to Trump’s lead in the polls

Next week, the focus is on the US election and then straight into the BOE and Fed meetings. The US election is too close to call. The latest poll average from RealClearPolitics has Trump in the lead, with 48.4% of the vote, and Harris expected to win 48.1%. Thus, the outcome of the election is a coin toss. The Congressional elections are also very tight and there are four potential outcomes from the Congressional race alone: an outright win for the Democrats, an outright win for the Republicans, a Republican Senate and Democratic House, or a Democratic Senate and a Republican House. Not only is it too close to call who will become President next week, but it is also difficult to ascertain what that will mean for the US economy, as Congress acts as a check on the President’s policy plans.

As we lead up to the election, stocks and global bonds are rallying and risk sentiment is strengthening. The dollar is down a touch and Bitcoin is also up a further $1,300 on Friday. This is considered the ultimate Trump trade, which is a sign that the market is still be pricing in a Trump victory next Tuesday.