Treasury yields' next move may hinge on US jobs data

The calendar may still say Monday, but there is already plenty for markets to digest over the coming days.

Geopolitical risks have yet to clear, oil prices are higher, bond yields are surging and equities alongside gold are again in the crosshairs. With month-end and quarter-end volatility starting to build, the outcome is far from settled.

The biggest macro catalyst on the agenda, though, is arguably Friday's US jobs report.

The immediate concern for markets is not that the labour market has suddenly turned weak. Rather, the worry runs in the other direction.

US economic activity has remained surprisingly resilient with rates elevated, and bond investors are finding that resilience harder to ignore. The September flash composite PMI came in at 58.4, its strongest level in more than five years, with the components pointing to strength in both hiring and price pressures.

In my view, that changes how traders ought to think about the jobs numbers due on Friday.

In normal times, strong employment would be welcome. More jobs would support household incomes, keep consumption steady and hand companies a healthier backdrop.

These are not normal times, however.

The Federal Reserve recently increased its benchmark rate by 25 basis points to a range of 3.75% to 4.00%, the first hike in over three years, while signaling that additional tightening may be needed to rein in inflation. At the same time, 10-year Treasury yields have already climbed through the psychologically significant 5% mark this month.

So a further resilient jobs report could quickly rekindle the familiar “good news is bad news” trade in markets. With yields pressing toward 5.20%, the stakes are high.

Payroll growth is not the only thing to watch, either. I would be looking just as closely at the unemployment rate and, perhaps even more, at wages. Robust hiring alongside faster wage growth would bolster the case that domestic inflation pressures are too persistent for the Fed to let up.

That could, in turn, keep upward pressure on Treasury yields, weigh on rate-sensitive tech stocks and give the dollar another push higher.

By contrast, a soft report would raise a more interesting question.

Would Treasury yields find relief and head lower? Would falling discount rates lift technology shares? Or would markets at large start to worry that higher borrowing costs are at last making their way into the real economy?

That last question could prove decisive in how incoming US data shape the market's next phase.

For the past few weeks, inflation concerns coming from the supply side of the oil market have taken center stage. Now labour market figures are putting domestic demand back in the spotlight.

If energy inflation remains hot at the same time that employment, wages and the broader demand backdrop all stay strong, the Fed would have a considerably larger problem to manage.

From there, the next question the bond market may have to face is whether 5% yields is actually restrictive enough.