A Hawkish Fed, a Weak Jobs Print and an Oil Shock Pull ZT in Opposite Directions
Front end Treasury pricing is being pulled by three forces at once: a Federal Reserve that has returned to tightening, a cooling labor market, and an energy shock tied to the war with Iran.
The Federal Open Market Committee raised the federal funds target range by 25 basis points to 3.75% to 4.00% on September 16. The vote was unanimous at 12 to 0, and it was the first hike since 2023. The median projection points to one more quarter point increase by year end. Since then, the data has been mixed. August core PCE inflation, released September 30, rose 3.0% year over year against forecasts near 3.3%, helped in part by annual methodology revisions. On October 2, September nonfarm payrolls rose only 29,000 versus a consensus near 84,000. The unemployment rate rose to 4.2%, and July and August were revised down by a combined 60,000 jobs. Odds of an October hike faded, and December is now seen as the more likely window. The 2 year yield, the most sensitive to Fed expectations, rose to 4.92% on September 28, fell to 4.78% on October 1, and sat near 4.84% on Friday.
Energy is the other swing factor. Brent crude topped $107 on September 28 after President Trump rejected Iran's proposal to reopen the Strait of Hormuz. It then eased to around $101 to $102 on Friday after the G7 agreed to release up to 100 million barrels of emergency oil and diesel reserves over four months. Watch the September CPI report in the middle of October and the Fed decision on October 28.
What the Market Has Done
- The market has been in a downtrend since February.
- Throughout this period, prices have stayed under VWAP for most of the year.
- From May to August, price action was generally rotational, but it moved within a sloping down range with lower lows and lower highs between 103-050 (Daily level 1) and 102-220 (Daily minor level 1).
- Then, in the first week of September, sellers stepped down offers to 102-220 and compressed prices against 102-160 (Daily level 2), a level from 2025.
- Subsequently, on September 10, the market broke below 102-160 and sold off to 102 (Daily level 3), where there was some buying response.
- However, on September 23, the market made another leg lower to 101-192 (Daily level 4), where buyers absorbed prices and held the level.
- As a result, price rotated back up toward the 102 level.
What to Expect in the Coming Weeks
Watch 102 (Daily level 3) and 101-192 (Daily level 4) as the key levels.
Neutral Scenario
- Expect the market to rotate two-way within the current range between 102 and 101-192 to re-establish value.
- A possible supporting condition for this scenario is mixed data into the October 28 FOMC meeting, with September CPI landing near expectations and the Fed holding steady while keeping the door open to a December hike.
Bearish Scenario
- If buyers are not able to hold 101-192, expect a move down to the 101-080 area (Daily level 5), a level from 2024.
- Expect a buying response there. If buyers do not hold this level, expect a continued selloff below 101, possibly toward 100-250.
- A possible trigger is a hotter than expected September CPI report in the middle of October, or hawkish messaging around the October 28 decision that keeps another hike in play before year end. A renewed oil spike if Strait of Hormuz talks stall over the next few weeks could add to this and push the 2-year yield higher.
Bullish Scenario
- If sellers do not defend 102, expect a move up toward 102-160 (Daily level 2), a level from 2025. Expect sellers to respond there.
- A possible trigger is a softer than expected September CPI report in the middle of October, paired with a Fed on October 28 that signals patience after the weak September jobs report. Progress on Strait of Hormuz talks that pull oil lower could reinforce this. Together these could reduce expectations for a December hike and pull the 2-year yield lower.
Bottom Line
Technically, ZT is balanced between 102 (Daily level 3) and 101-192 (Daily level 4), with Daily level 2 above and Daily level 5 below marking the next areas of interest. Over the next few weeks, the September CPI report in the middle of October and the October 28 FOMC decision are the main scheduled events that could move rate expectations. A Fed that restarted hikes in September, a soft September jobs report and oil prices tied to Strait of Hormuz headlines keep the front end sensitive to each release. Watch how price reacts at 102 and 101-192 around these events. Will buyers defend 101-192 again, or will sellers take control of 102?
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Disclaimer:
This article is provided for informational and educational purposes only and does not constitute financial, investment, or trading advice. The analysis presented reflects the author’s market observations and opinions at the time of writing and is not a recommendation to buy or sell any futures contract, security, or financial instrument. Futures trading involves significant risk and is not suitable for all market participants. Losses may exceed initial margin deposits, and market conditions can change rapidly.
Any scenarios, levels, or market expectations discussed are hypothetical in nature and are intended solely to illustrate potential market behavior. They do not represent actual trading results and should not be interpreted as guarantees of future performance. Past performance, market behavior, or historical price action are not indicative of future outcomes.
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