• “Employment has clearly weakened,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Markets are reacting here as it looks unlikely we get the jobs report Friday. Couple this with the revisions to the official jobs number and it reinforces the Fed reengaging with rate cuts and also reinforces the overall lower rate story.”

Yields on Treasuries fell the most in nearly a month as traders added to bets the Federal Reserve will cut interest rates twice more this year to support a weakening US labor market.  Rates on two-year notes, which track expected Fed rates moves, moved seven basis points lower to 3.54%, the biggest decline since Sept. 5. The benchmark 10-year yield dipped five basis points to 4.10%.

The ADP report — which took on added significance as the US government shutdown may delay the release of other jobs data —
showed a sharp decrease in private-sector payrolls in September. While ADP acknowledged some issues with the way the numbers were crunched, the report provided fresh evidence that the labor market is weakening.

The ADP data suggested the US economy is ill-prepared to cope with a prolonged US government shutdown.  “It’s possible we could have a longer shutdown, and it is non-linear after contract and government workers start to miss a couple of paychecks,” Tiffany Wilding, economist at Pimco told Bloomberg TV. “One paycheck, probably okay, but as you get more, then you’ll see more impact on consumption.”

Traders added to bets on Fed rate cuts, with interest-rate swaps tied to the dates of upcoming policy meetings pricing in
46 basis points of easing by the end of the year versus 42 basis points before the data. The US government funding standoff leaves traders relying on private sources of economic data to inform their expectations for Fed policy and interest rates. The Bureau of Labor Statistics has said that weekly jobless claims data normally released on Thursday and the monthly employment report — the September edition of which is scheduled for Friday — are subject to delay if the shutdown is still in effect. Later in the month, US consumer and producer price inflation reports scheduled for mid-October would also be at risk, with the Fed’s next rate decision scheduled for Oct. 29.

“The market is going to have to focus on independent private sources to get a sense of what’s going on,” said
Wellington Management portfolio manager Brij Khurana. “If the administration does go forward with cutting head count, then it really does have an economic impact. So there is potential for this to have an economic impact and probably more so than what we’re used to.”

Private-sector payrolls decreased by 32,000 after a revised 3,000 decline a month earlier, according to ADP Research data released Wednesday. The median estimate in a Bloomberg survey of economists was for a 51,000 gain. ADP said a recalibration in the way the data was benchmarked accounted for some of the apparent weakness.

“Employment has clearly weakened,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Markets are reacting here as it looks unlikely we get the jobs report Friday. Couple this with the revisions to the official jobs number and it reinforces the Fed reengaging with rate cuts and also reinforces the overall lower rate story.”