US yields dive as job growth slows, Fed rate cut in September seen likely

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US two-year yields drop to lowest in five weeks
Fed seen as likely to cut rates in September, futures show 81% chance
Manufacturing PMI contracts for fifth month, factory employment hits five-year low
Fed officials downplay slowdown in jobs growth
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 1 (Reuters) - U.S. Treasury yields plummeted after data showed on Friday the world's largest economy created fewer jobs than expected in July, increasing the odds the Federal Reserve will resume cutting interest rates at its September meeting.
U.S. two-year yields, which are tied to the Fed's monetary policy, dropped 24.1 basis points (bps) to 3.710%, on track for their largest daily fall in two years. The yield also dropped to its lowest since June 30.
The benchmark 10-year yield also fell to a five-week trough and was last down 13.4 bps at 4.223%. It was on pace for its biggest one-day decline since early April. Data showed U.S. job growth slowed more than expected last month, while June's data was revised sharply lower, pointing to a sharp moderation in the labor market.
Nonfarm payrolls increased by 73,000 jobs last month after rising by a downwardly revised 14,000 in June, data showed. Economists polled by Reuters had forecast payrolls increasing by 110,000 jobs after rising by a previously reported 147,000 in June. May's data was also revised downward.
The unemployment rate rose to 4.2% from 4.1% in June.
"The Fed is caught between above-target inflation and the uncertain impact of tariffs on the inflation picture moving forward with a clearly slowing labor market," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia.
"Today complicates things further in that the labor market, which was already cooling, and I think the Fed had even already acknowledged that the labor market was cooling. Obviously, (labor market concerns) accelerated with today's report, but the Fed remains caught between the two sides of its dual mandate. So you're seeing a sharp bull steepening in the yield curve, and you're seeing expectations for a September rate cut." The yield curve bull steepened after the jobs report, with the gap between two-year and 10-year yields widening to as much as 52.6 bps, the highest gap since July 23 US2US10=TWEB , compared with 41.5 on Thursday. The curve was last at 51.2 bps.
A bull steepener refers to a scenario in which shorter-dated yields are falling much faster than those on long maturities, which reflects expectations that the Fed will cut soon.
RISING ODDS OF SEPTEMBER CUT
U.S. rate futures have now priced in an 81% chance that the Fed will cut rates in September, according to the CME's FedWatch. That chance was just 38% late Thursday. Rate futures have also factored in 58 bps of easing this year, compared with just 39 bps of rate declines on Thursday. Fed Governor Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman were two dissenting governors to Wednesday's decision by the Federal Reserve Open Committee to keep rates unchanged in the 4.25%-4.50% target range. They said on Friday they did so largely due to rising concerns about the job market, in statements made public just ahead of the release of hiring data that bolstered their position.
Other Fed officials on Friday, however, downplayed the jobs report, saying it would not have influenced the decision to keep rates unchanged on Wednesday. Cleveland Fed President Beth Hammack told Bloomberg TV that a "disappointing" jobs report released Friday doesn't mean the Fed should have cut rates at its policy meeting this week.
Atlanta Fed President Raphael Bostic in a CNBC interview echoed Hammack's sentiment, saying he does not believe the hiring data suggest it was wrong for the Fed not to cut rates this week.
Other economic data on Friday also showed weakness, with yields further declining. Data showed U.S. manufacturing contracted for a fifth straight month in July while factory employment dropped to the lowest level in five years amid tariffs that have raised prices of imported raw materials. The Institute for Supply Management said on Friday its manufacturing PMI dropped to 48.0 last month from 49.0 in June. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 10.2% of the economy.
Economists polled by Reuters had forecast the PMI edging up to 49. Earlier in the session, President Donald Trump unleashed the latest wave of steep tariffs that pushed global stock markets lower, including Wall Street. Brazil was hit by 50% tariffs, Switzerland got 39%, Canada had 35%, India had 25%, while Taiwan got 20%. Treasuries showed little reaction to the tariff news, as investors positioned for the nonfarm payrolls data that came after all the trade headlines
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Toby Chopra, Rod Nickel and Chizu Nomiyama )