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Friday’s nonfarm payrolls will be the highlight for the week. Inflation worries have fallen off the radar as far as the market is concerned. Instead, the state of the labour market (considering the totality of data) would be parsed to figure out the pace and magnitude of Fed easing ahead. Consensus expects a 165k print for August (roughly in line with the three-month average), marking a rebound from 114k in the preceding month. Meanwhile, the unemployment rate is expected to shift down a notch to 4.2%. Ahead of the key data releases, market participants may also focus on Wednesday’s JOLT job openings data. We note that weekly jobless claims have largely been in line with expectations and there have been no material signs of weakness thus far.
Against this backdrop where the labour market looks balanced thus far, USD rates still have a very dovish take on the Fed, factoring in 100bps of cuts this year and close to 225bps of cuts by end-2025. Some of this may be attributed to the fact that the Fed has pencilled in a longer-term neutral rate of 2.75%. Accordingly, this has become the guidepost for where rates pricing is gravitating towards as the Fed normalizes over the coming year. However, we note that estimates of neutral can swing. At the most hawkish point this year, the market was ignoring the Fed and looking at a longer-run neutral closer to 4%. In the absence of market stresses or a string of weak US data, we suspect that yields may be too low. A grind higher in yields into labour market data on Friday appears likely. 
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