The softer US jobs report on Friday might have offered markets some much-needed relief before the weekend but I don’t think it changes the main thing traders should be watching this week. And that is still the bond market.

The September jobs report showed non-farm payrolls rising by just 29k, well below expectations. 10-year Treasury yields initially fell on the release, dipping to a low 5.16%. However, that didn’t last long whatsoever. Yields quickly bounced back to wrap up the week near 5.28%, highlighting just how fragile the relief in the bond market remains.

In seeing that reaction, I would argue that the rebound in yields says a lot more than the initial drop to the labour market data.

While the jobs numbers have certainly taken some pressure off the Fed decision ahead of its October meeting, it is important to be wary that traders haven’t abandoned the tightening story altogether.

Markets are now pricing roughly an 82% chance that policymakers leave interest rates unchanged later this month. That is a slight bump up from the roughly 72% odds before the jobs report last week.

However, a 25 bps rate hike is heavily priced in for December at this stage. Fed funds futures show a roughly 83% chance of the central bank raising interest rates in the final month of the year. So, the message isn’t necessarily that the Fed is done in terms of policy tightening. It is that the Fed may simply have more room to wait and assess further inflation and economic developments.

And that is where the bigger problem for bonds comes in. The forces pushing long-end yields higher aren’t solely about what the Fed does at its next meeting. Persistent fiscal deficits, heavy Treasury issuance and a rising term premium are all key factors in driving investors to demand more compensation for holding longer-dated debt.

So in the meantime, that continues to put the emphasis on what will happen with Treasury yields – particularly at the long-end.

If yields start pushing back towards the highs last week despite softer economic data, it would suggest that those structural pressures are still dominating the bond market. And if that happens, equities may very well struggle to enjoy much lasting relief even as expectations of a Fed rate hike in October continue to fade.

Looking at the economic calendar, the next key US economic data to watch will be the September CPI report on 14 October. That will be a rather decisive data release in determining whether the Fed can afford to stay patient.

And beyond that, the US midterm elections on 3 November will also bring fiscal policy and government finances further into focus.

This article was written by Justin Low at investinglive.com.