The July US non-farm payroll data is about to be released, and the market is closely watching its impact on the middle of the yield curve (2-7 years). With the Federal Reserve keeping interest rates unchanged and Chairman Powell signaling hawkish signals, a significantly below-expected non-farm payroll data could trigger bets on an early rate cut, exacerbating volatility in the middle of the yield curve. Meanwhile, imported inflationary pressures and strong GDP data complicate the policy outlook. The US dollar remains strong, and the foreign exchange market is sensitive to employment data. The euro is relatively resilient, while the British pound may amplify fluctuations along with US Treasury bonds. Overall, the non-farm payroll report will be a key trigger for the market to reassess the path of interest rates and asset allocations.

With the arrival of non-farm payroll data, the “middle of the curve” has become the new focus of the market

This Friday's release of the July US non-farm payroll report will be a key event for global financial markets. Although the Federal Reserve held its benchmark interest rate steady this week, the employment data remains crucial for the path of interest rates, particularly given the current resilient economic growth and persistent inflation risks. The consensus forecast for July's non-farm payroll figures is 110,000, down from 147,000 in June, with the unemployment rate expected to rise to 4.2%. An unexpectedly weaker figure could fuel market bets on an early shift to easing by the Federal Reserve, with a particularly significant impact on the middle of the yield curve (2-7 years).

Interest rate markets are increasingly focused on this range. If job creation falls below 100,000 and the unemployment rate rises above 4.3%, the market could experience significant volatility due to adjustments in expectations. Compared to short-term interest rates, which are still anchored by inflation expectations and long-term interest rates constrained by fiscal deficit pressures, the mid-range's flexibility and sensitivity to macroeconomic signals make it a key battleground for traders adjusting their positions and trading strategies.

The Fed maintains its policy unchanged, while hawkish signals weaken expectations of a rate cut.

Despite support for a rate cut from some members, Fed Chairman Powell maintained a hawkish stance at the policy briefing, emphasizing that inflation is currently above the 2% target and the labor market remains tight, justifying maintaining a high interest rate policy. He also stated that flexibility in responding to future risks is necessary, further dampening market expectations for a September rate cut. CME FedWatch data shows that the probability of a September rate cut has dropped from nearly 60% before the meeting to around 43%.

This stance makes market pricing more dependent on actual economic data, particularly employment and wage growth. If non-farm payroll data continues to be subdued, the Fed may remain on the sidelines; however, a significant deterioration in the job market could force it to adjust its policy pace. Notably, the preliminary estimate of US GDP for the second quarter showed a 3% annualized growth rate, far exceeding market expectations of 2.4%, demonstrating robust economic fundamentals and providing some support for the Fed's hawkish stance.

The shadow of inflation has not yet receded, and policy games have exacerbated market volatility.

Trump's recent announcement of steep tariffs on Brazilian copper products and their derivatives has sparked market concerns about a new round of imported inflation. Combined with the previously rising pressure on labor costs, the Federal Reserve's policy balance between combating inflation and supporting growth has become even more complex. Against this backdrop, short-term interest rates are unlikely to adjust quickly, and the front end of the interest rate range remains relatively stable. However, long-term interest rates face pressures from expanding fiscal deficits and adjustments in the global demand structure, so changes in the curve are likely to be concentrated in the middle portion.

Furthermore, while US job openings fell to 7.43 million in June, indicating a cooling in job demand, they remained above the historical average, suggesting the overall labor market remains resilient. Furthermore, the ADP report showed private sector employment increased by 104,000 in July, significantly higher than the 23,000 in June, confirming that businesses remain willing to hire. These factors, along with wage growth expectations, form the core of the uncertainty surrounding interest rate expectations.

The US dollar continues to be strong, and the foreign exchange market remains highly sensitive

With the Federal Reserve's hawkish stance further strengthened and US economic data showing solid performance, the US dollar has continued its upward trend since July. The EUR/USD exchange rate has fallen to 1.1400, a low of more than a month. Analysts point out that if the non-farm payroll data continues to be strong, the US dollar may rise further, and the euro against the US dollar may test the low of 1.1340 or even 1.1280. If the data is neutral, the US dollar may remain volatile at a high level; if the data falls short of expectations, the US dollar may face a short-term technical correction.

Notably, the Eurozone interest rate market's correlation with US Treasury yields has declined, particularly at the short end, with the yield curve practically decoupled. This suggests that even if the non-farm payroll data triggers significant volatility in US Treasury bonds, the impact on the Eurozone will be relatively limited. In contrast, the British pound remains highly correlated with US Treasury fluctuations, with the 10-year UK bond yield, in particular, being highly sensitive to changes in US interest rates of the same maturity. If the non-farm payroll data triggers adjustments in medium- and long-term interest rates, the UK bond market's reaction will be worth watching.