Good Monday AM,
No data today but bonds are consolidating a bit regardless.
It is no surprise after last week’s strong run by bonds, that we will have to give up some gains to take the next step to lower rates. The 10yr has back ed up to 4.65% which does not seem all that bad since a week ago, we were 30bps higher. The data this week is very limited. I suspect we will see some more buying of bonds soon. There was a piece out over the weekend talking about a large number of short positions in Treasuries and those will likely need to finish being covered as rates improve. I don’t think there is a huge reason to lock today but if you float, just stay close to see any material changes.
In a 180 degree change of sentiment…
The white-collar labor market is softening to a point that companies are encountering an issue that would have been unthinkable in the era known as the Great Resignation. These days, too few people are voluntarily leaving their jobs. Turnover has declined so steeply at some large employers that companies now find themselves over budget on certain teams, requiring leaders to weigh whether to postpone projects or to cut additional staff as the end of year approaches. This is the precursor for unemployment to increase… and with that the path to the Fed cutting rates.
Last week was when the talk of Fed rate cuts really started to become real. While the Fed didn’t make any formal policy changes at its meeting on Wednesday, the Powell press conference was widely seen as having a dovish tone to it. He talked about the risks in the economy becoming more balanced. He talked up progress that we’ve seen towards returning to the inflation goal. He talked down a jump in inflation expectations that was seen in the most recent UMich sentiment report.
Meanwhile, the economic data for the most part all came in on the cool side.
Friday’s jobs report wasn’t terrible. But the number of new jobs created did come in lower than expected. And there were downward revisions to the prior two months. The monthly wage growth number came in lower than expected. And the unemployment rate ticked up to 3.9%. We also saw mediocre numbers in other measures last week, including ISM manufacturing, in which the employment sub-index fell into contraction territory. In a note to clients yesterday, Tim Duy of SGH Macro Advisors wrote, “With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle.”
If we are going to get rate cuts sometime in the coming year, then the interesting question now is whether such cuts will be effective, and whether the Fed can foam the runway just enough to make the landing smooth and soft. Obviously, that’s TBD. But alongside all the macro news, the market clearly liked what it saw and heard. The S&P 500 rallied nearly 6% over the last 5 days. 10-year yields, which briefly broke through 5% in the middle of October are down to 4.6%. Put it together, and the Bloomberg 60/40 Index (measuring your generic diversified portfolio of 60% stocks and 40% bonds) just had its best week since November 2022.
Please remain safe and healthy, make today great!