U.S. 10-year Treasury flat ahead of payroll report, Fed hike likely in June

The U.S. 10-year Treasury kept hovering around 1.78 marks on Friday as markets await U.S. employment report. The markets expect non-farm payrolls to increase +200k in March, versus the +242k reading seen in February; alongside no change in the unemployment rate of 4.9%.The benchmark 10-year treasury yield were lower 0.17% at 1.78 pct.

Yesterday, the 2-Year yield found further downward pressure, breaking below the 0.75%-mark, alongside a decrease seen in the 10-Year yield, holding just below the 1.80%. Despite breaking below 1.80% on Thursday, we continue to expect the 10-Year yield to resume its 1.80-2.00% trading range, implying potential selling in the wake of the March employment report on Friday, assuming that non-farm payrolls don’t surprise greatly to the downside.

Meanwhile, great focus will likely be paid to gains in total private employment which we expect will increase around +200k. Beyond the headline, we expect average hourly earnings will increase +0.2% m/m, alongside an increase in weekly hours of 34.5. Treasuries saw solid buying power across the curve on Thursday, amidst a relatively light flow of data ahead of the March employment report on Friday.

In terms of data, markets show muted reaction to weaker than expected jobless claims data that were largely contrasted by a solid rebound seen in Chicago PMI data for March. Thematically, manufacturing appears to be on the mend as we move further into 2016 despite some lingering weakness.

This in and of itself should provide a modest boost to GDP growth, particularly from an inventory standpoint. Given the importance of business spending in terms of both headline growth, but also for inflation, we suspect that gains seen elsewhere are likely to catch the attention of the FOMC, providing another layer of support for an eventual move to raise rates later in the year.

At present we continue to expect the next Fed Funds hike is likely to be seen at the June meeting (this was supported by commentary from Chicago Fed President Evans on Thursday) .

Aside from non-farm payrolls, markets also receive ISM manufacturing, University of Michigan consumer sentiment, construction spending and vehicle sales releases to finish off the week.