💥 Bonds Bet on Bad News: Markets Rally as Weak Jobs Data Could Force the Fed’s Hand

Wall Street is holding its breath—and buying bonds.

U.S. Treasuries edged higher Wednesday as investors positioned themselves for what could be a pivotal moment in the economic narrative: a delayed January employment report that may confirm fears of a cooling labor market and accelerate expectations for interest-rate cuts in 2026.

After months of stubborn inflation and cautious Federal Reserve messaging, financial markets are increasingly wagering that softer data—not resilience—will define the next chapter of the U.S. economy.

Government bond yields, which move inversely to prices, have quietly dropped to their lowest levels in weeks as traders seek safety ahead of the jobs release.

The move reflects a growing conviction that the central bank may soon have to pivot from patience to action.

“The labor market appears to hold the key to the path of rates,” said Brendan Murphy, head of fixed income for North America at Insight Investment.

Money markets now anticipate roughly 59 basis points of easing by year-end—effectively two quarter-point rate cuts with a meaningful chance of a third.

That shift has gathered momentum following:

National Economic Council Director Kevin Hassett added fuel to the narrative this week, warning that lower job numbers are likely in the months ahead.

Economists surveyed by Bloomberg forecast that employers added about 65,000 jobs in January, which would mark the strongest hiring in four months—but still signal a subdued labor market. The unemployment rate is expected to hold steady at 4.4%.

Yet investors are already bracing for something weaker.

“The market is really poised for that labor market data to come in weaker,” said Rufaro Chiriseri, head of fixed income at RBC Wealth Management. If hiring undershoots expectations, she noted, the 10-year yield could fall toward 4%, a level not seen since late November.

Beyond the monthly report, analysts are closely watching an annual revision to payroll figures that could redraw the employment landscape for the year through March 2025.

Bloomberg economist Anna Wong estimates methodological changes could trim roughly 20,000 jobs per month from future calculations—an adjustment that would reinforce the perception of a slower, less dynamic labor market.

Currency markets are also responding. The U.S. dollar slipped against major peers ahead of the report, reflecting expectations that a softer economy could force the Federal Reserve into a more accommodative stance.

Tuesday’s weaker-than-expected retail sales data added to that concern, suggesting consumers—long the backbone of U.S. growth—were losing momentum as the year closed.

Federal Reserve Chair Jerome Powell has acknowledged signs of stabilization, but lingering political uncertainty—including the recent government shutdown—could push policymakers to react quickly if employment deteriorates.

Murphy said the Fed would likely remain “responsive to any additional signs of labor-market deterioration.”

For global investors, that sensitivity is now the central story.

“Jobs data will be quite relevant for fixed-income markets and expectations of Federal Reserve policy, especially if layoffs are picking up,” said Nannette Hechler-Fayd’Herbe, chief investment officer for EMEA at Lombard Odier. “This is certainly the area of focus right now.”

In an unusual twist, markets are rallying not on strength but on the expectation of weakness. Slower hiring could give the Fed the justification it needs to begin easing policy after years of aggressive tightening.

Whether Wednesday’s report confirms that thesis—or challenges it—may determine the trajectory of interest rates, bond markets, and the dollar for months to come.

For now, traders are sending a clear signal:

The next move in markets depends less on inflation—and more on whether America is still hiring.