Employment is back in the driver’s seat—and inflation has been politely asked to move to the back. This week’s market narrative is a familiar one, but with a few important twists: labor data continues to soften just enough to keep the Fed on an easing path, and inflation remains well-behaved enough to stay out of the headlines. But beyond the policy debate, there’s a quieter development worth flagging, the triangular consolidation in 10s. Yields haven’t broken lower, they haven’t broken higher, and yet the range keeps tightening. Whether this is simply a pause, or the market coiling for something more directional—is the question lurking beneath an otherwise calm surface.
Employment in the driver seat
In the week just past, the economic data cemented expectations for another 25 basis point rate cut when the Fed meets on December 10th. Specifically, ADP for the month of November showed a decline of 32,000 jobs. This largely served to reinforce the notion that we’re in a no hire, no fire labor market at the moment. Consistent with this was an unexpected drop in initial jobless claims to 191,000. We also saw the Revelio Labs print at negative 9,000 for the month of November, and that compares with a downwardly revised negative 16,000 in October. Overall, the theme for the employment proxies has been mixed to weaker. As a result, not only has this firmed up expectations for a Fed rate cut, but it also reduces the probability that Powell strikes a particularly hawkish tone at the press conference.
This dim outlook is reinforced by the continued headlines about large-scale layoffs and of course the employment proxies. It’s also worth noting that within the ADP series, we saw all of the job losses coming from smaller businesses. This is very consistent with the fact that smaller businesses are reportedly suffering more from tariffs and the trade war uncertainty. It will be worth following this series to see if, in fact, those job losses spread to medium and large size firms in the near term.
At some point over the last several weeks, there was lots of doubt that the Fed was going to be bringing rates lower. But between some of the rhetoric from the likes of William and Waller, coming into this week, we saw a return of market pricing to nearly 100 percent odds of another 25 basis point cut in December. Now this leaves the question of how Powell is going to characterize next week’s cut. Is it going to be of the insurance variety or is it simply the latest step on the journey closer to neutral? At this stage and looking out into 2026, it’s that dynamic which is occupying the attention.
Well contained inflation
As the jobs data is in the driver seat for the Fed, market has moved past peak reflationary angst that really characterized the summer months in the treasury market. We have now seen that there was some tariff pass-through, but it has been reasonably well-contained. And perhaps more importantly, the core inflation measures haven’t managed to materially accelerate to the point of becoming troubling for the treasury market or monetary policy makers. For evidence, we looked to 10-year breakevens, which are still sub-225 basis points. Now, when we look at this series over a 25-year history, the average is 207 basis points. So we’re still above the long-run average, but nowhere near the 300 basis point peak seen during the pandemic.
As long as tariff pass-through is spread out over a longer period of time, then we won’t see forward inflation expectations reset to a materially higher plateau. In fact, in considering the year ahead, as the realized inflation data comes in, I expect breakevens to drift lower. When looking at the period between 2014 and the end of 2019, what I see is that breakevens averaged 178 basis points. I am using this as a medium-term target for break-evens once the market is convinced that inflation has in fact, not only not reaccelerated because of the trade war, but also continued to moderate as some of the key distortions created by the pandemic have worked their way out of the real economy.
A Triangular Pause in 10s
With the above backdrop, there is still one important caveat when it comes to the treasury market, and that caveat remains the global sovereign debt complex. As we’ve seen across JGBs, EGBs, and gilts, yields have displayed a notable stickiness to the upside. While U.S. Treasuries have partially decoupled in recent weeks, the broader global fixed-income landscape continues to cap the downside in U.S. yields, making it difficult for the 10-year to sustainably trade below the 4% threshold. In other words, this is not an outright bond-bearish environment, but it is one that has constrained the scope for a more meaningful rally.
Technically, this dynamic has manifested itself in the 10-year yield consolidating into a tightening triangular formation, with lower highs pressing down against a firm floor near 4%. Volatility has compressed, signaling that the market is increasingly coiled for a directional move, even if conviction on timing remains limited. Importantly, this consolidation reflects not just uncertainty around Fed policy, but also a balance between domestic disinflationary forces and persistent global term-premium pressures.
While the baseline case still favors range-bound trading, the risk of an upside resolution cannot be ignored. A break higher in yields would likely be driven less by U.S. inflation re-acceleration and more by external or structural forces—including renewed upward pressure from global sovereign markets, the AI capital expenditure, increased Treasury supply absorption challenges, or a resurgence in term premium as liquidity conditions tighten. In that sense, any upside move in yields would look less like a growth scare and more like a plumbing-driven repricing, consistent with a world where global borrowing costs remain structurally higher.
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