April non-farm payrolls are coming tonight, bond traders bet on tariffs "freezing" the U.S. job market

According to Zhitong Finance APP, the April non-farm payroll report will be released tonight. Economists expect that the April U.S. employment report will show an increase of 135,000 jobs, down from 228,000 in March. On the eve of the report's release, the money market anticipates that the Federal Reserve will implement nearly four rate cuts of 25 basis points each in 2025, one more than the expectations before President Donald Trump announced a large-scale tariff policy last month. U.S. bond investors are betting that the tariff policy implemented by President Trump will slow down the growth of the world's largest economy, thereby forcing the Federal Reserve to lower interest rates.

At the same time, Wednesday's position data showed that long positions in U.S. short-term government bonds are increasing. Investors are betting that the impact of Trump's large-scale tariff policy on economic growth will outweigh its inflationary effects.

However, economic data continues to test expectations of a significant economic slowdown: on Thursday, a manufacturing survey result exceeded expectations, prompting traders to cover some of their rate cut bets. The tense atmosphere in the market has made the April non-farm payroll report highly anticipated, as it will provide an initial glimpse into the impact of tariff policy uncertainty on the labor market.

Lee Hardman, a strategist at Mitsubishi UFJ Financial Group (MUFG), stated, "Market participants are weighing the impact of tariff policy on Federal Reserve decisions, with concerns about a significant economic slowdown far outweighing the short-term inflationary risks brought by tariff increases."

For bond investors, a key question is whether the recent economic pessimism reflected in various surveys will translate into core economic indicators such as employment and consumer spending. In April, U.S. consumer confidence fell to its lowest level in nearly five years, while a measure of U.S. manufacturing activity also showed the largest contraction in five months.

Signs of economic weakness have driven up the prices of U.S. short-term government bonds this month, steepening the yield curve. In April, the performance of 2-year and 5-year government bonds outperformed that of 30-year government bonds, with the performance gap reaching its largest level since early 2023.

Negotiations between the U.S. and major trading partners are ongoing or in preparation, and there remains uncertainty about how and when the tariff policy will be implemented, making the economic outlook even more murky.

Japan has indicated that relevant discussions may accelerate in mid-May. Japanese Finance Minister Shunichi Suzuki even hinted that Japan might use its substantial holdings of U.S. government bonds as a bargaining chip, although it is unclear how serious he is about this statement. As the largest overseas holder of U.S. government bonds, Japan holds approximately $1.1 trillion in U.S. debt.

Importance of Key Data

Currently, Federal Reserve officials are waiting for further verification of "hard data" while being cautious about the inflation risks that tariffs may trigger. Federal Reserve Governor Christopher Waller stated last week that he would support a rate cut if the unemployment rate rises significantly. If Trump reinstates more aggressive tariff policies and companies begin large-scale layoffs, the unemployment rate could experience such a situation.

BlackRock's Chief Investment and Portfolio Strategist for the Americas, Gargi Chaudhuri, pointed out, "A cooling labor market is a necessary condition for the Federal Reserve to continue implementing accommodative policies." She believes that although the weak employment data in April "is a step in that direction," the Federal Reserve needs to see more data reflecting the trend of economic weakness. "They must consider all data comprehensively; I think a single weak data report is not enough for them to hint at or initiate a rate-cutting cycle."

Before the Federal Reserve meeting on May 6, the Fed enters a quiet period. Traders expect the Fed to cut rates about four times by 2025, with the first cut possibly in June. In mid-March, the market anticipated only two rate cuts this year.

Michael Koozer, a portfolio manager at Pacific Investment Management Company (Pimco), said in an interview on Wednesday, "If we see a substantial turn in the economy, the Fed is likely to respond later this year, and the response could be quite significant." Koozer also revealed that Pimco has been increasing its holdings of U.S. Treasury bonds with maturities of 5 to 10 years.

Economists expect the April U.S. employment report to show an increase of 135,000 jobs, down from 228,000 in March. However, most believe this data can only reflect the limited impact of the U.S. tariff increases. Even if the report shows strong data, investors may still view it as a reflection of the past and continue to expect a wave of layoffs in the coming months.

Anna Wang and others from the Bloomberg Economics team wrote that the April data to be released on Friday will be "the last reliable data before the storm," and "the labor market may show more obvious signs of deterioration as early as May."

Options trading around the non-farm payroll report—specifically, the one-day straddle options on 10-year U.S. Treasury bonds that will expire at Friday's close—currently implies a volatility of about 9 basis points for the 10-year Treasury yield on that day, which is roughly comparable to the volatility observed when previous non-farm data was released.

In the U.S. Treasury futures market, the number of open contracts (i.e., the total risk taken on by traders) has surged sharply since the initial sell-off triggered by the announcement of tariff policies. In 5-year Treasury futures contracts, the number of open contracts has risen to the highest level since data began being recorded in the early 1990s