Continued weak job numbers means the Fed is likely to start its second round of quantitative easing measure in November.
The government said private employers added 64,000 workers last month, short of the 75,000 economists expected. Overall, 95,000 jobs were slashed as governments laid off workers, including temporary census employees.
"This might be one of the most important payroll numbers we have had in quite some time," said Jesse Litvak, a mortgage trader at Jeffries & Co. "The reason for that is simply because of timing. The next payroll print we have after this is on Friday Nov. 5. The issue here is that we have the election on Nov 2 and the next Fed Meeting is on Nov 3."
Expectations are indeed growing that the Fed will move ahead with QE2, fading its out with this point would likely come as an unwelcome surprise, Litvak said. Anticipation that the Fed will solidify QE2 on Nov. 3 has driven bond yields and the dollar sharply lower in recent days.
According to market reports, the yield on the 10-year Treasury note had already fallen to 2.37 percent from 2.38 percent late Thursday, on the back of speculation that the Fed would move ahead with QE2.
The Fed's goal is to drive interest rates down further from their already low levels in an aim to revive borrowing and spending. Bank of America Merrill Lynch analysts said they expect the 10-year Treasury rate to fall to 2.0% by the end of this year.
It's likely that the Fed, BofA Merrill analysts said, will put in place a flexible program that is large enough to extend the bond market rally. The Fed, analysts said, will likely announce an initial buying program of $500 billion over the six months, but promise that more will come if necessary.
Analysts think that the rate impact of QE2 comes from two factors. The first is pushing out the Fed rate hiking cycle out in time via communication strategy. The second is lowering term premiums because of Fed purchases, which makes the supply/demand imbalance in the fixed-income universe worse.
"Adjusting for how much we believe has already been priced in, we expect a further decline of about 30bp in the 10-year rate over the near term given a potential $1 trillion in Fed purchases over the next year," they said.