The jobs report was a relief, not a revelation

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Good day. American dockworkers have reportedly They reached a provisional agreement with their employers, taking an unpleasant risk of inflation off the table before we had a chance to properly worry. If you were one of the people who stockpiled toilet paper in anticipation of the strike, well, the next potential crisis is never far away. Email us your doomsday preparation tips: robert.armstrong@ft.com and Aiden.reiter@ft.com.

The jobs report was good, but not that good.

Last Friday’s jobs report showed that the economy added 254,000 jobs in September, well above expectations, and that unemployment fell from 4.2 to 4.1 percent. What’s more, the anemic figures for July and August were revised up by 55,000 and 17,000, respectively, softening a slowing trend that had helped push the Federal Reserve into a 50 basis point rate cut.

Queue of general rejoicing. Austan Goolsbee, president of the Chicago Federal Reserve, called the report “magnificent” in an interview with Bloomberg TV. Shruti Mishra, an American economist at Bank of America, called it an “A+ report.” Others suggested it was the end of recession fears.

This is all a bit rich. The panorama has not changed much. Last month we wrote: “whisper it, sing it, get a tattoo: there is no recession on the horizon yet.” That is still true. What we got from the jobs report is confirmation of what much other data has been suggesting. GDP growth was robust at 3.0 percent (not revised) last quarter, and September ISM surveys were strong, particularly for new orders. Etc.

Our data interpretation motto is “a month is just a month.” OMIJOM brings good and bad news. We still don’t have much of an understanding of the post-pandemic economy, and jobs data has been particularly iffy and difficult to read.

Earlier this year, the Bureau of Labor Statistics revised down its estimates from the previous year at around 818,000 jobs, due to structural problems in its birth-death model. This year’s figures could also be subject to major revisions. And while 254,000 new jobs is a big improvement over August’s 159,000, it might not be. that well of a number. like us wrote Recently, immigration has swelled the American labor force, and the break-even number of jobs (the number of new jobs needed each month to avoid an increase in unemployment) may be closer to 230,000, rather than earlier estimates of 100,000. .

If anything, this report marginally shifts the Fed’s focus away from recession fears and gently nudges it toward concerns about a reacceleration of inflation. For now inflation seems very near even defeated, but not completely defeated. One factor that still bothers is wage growth, which has stagnated at 4 percent, one percentage point above the pre-pandemic trend, for six months. Greater conflict in the Middle East could also drive up oil prices. Inflationary balance measures are increasing.

These lingering concerns, although small, are enough to take November’s 50 basis point cut off the table. We may be closer to the neutral rate than previously thought, and the FOMC will want to proceed cautiously. The futures market has almost completely shifted to anticipating a 25 basis point cut next month:

A couple more good employment reports and a gentle decline in wages, and Unhedged will be ready to join the celebration.

(Reiter and Armstrong)

What is happening at the long end of the curve?

It’s not a big move, but it’s big enough to require an explanation: Long-term Treasuries are selling off. Yields started rising the day before last month’s Federal Reserve meeting and haven’t stopped. Here is the tenth year:

This is slightly counterintuitive, since long-term interest rates are a combination of expected short-term interest rates, and short-term rates are falling. It’s also a bit surprising that when the Fed cut 50 basis points, yields rose, and then when the strong jobs report came out (which reduced the chances of another 50 basis point cut), yields rose again.

The movement of real rates has been greater than that of nominal rates. Since the 16th of last month, real yields (yields on 10-year inflation-protected Treasury bonds) have risen 19 basis points. On top of that, nominal yields have risen another 15 basis points.

There are several possible explanations:

• Both the 50 basis point cut and the strong employment report may have been understood as signs of a reduced possibility of recession. That makes Treasuries less attractive and risky assets like companies and stocks more so. Any portfolio rebalancing toward risk would have been overdone if short-term investors had bet heavily that jobs data would remain weak and the Federal Reserve would have to cut quickly. Capital Economics’ Joe Maher highlights that the strong jobs report was supported by other solid data and raises the question of “whether the Fed needs any cuts in November.”

• The market may be getting a little nervous that the Fed is cutting too much and therefore rates will have to be higher next year and beyond. Anshul Pradhan and his team at Barclays point out that “a dovish Fed reaction function to economic resilience actually argues for higher rates. . . 10-year yields are still too low by about 20 basis points. . . The Federal Reserve has focused more on [falling] inflation and continues to consider that the neutral rate is low.” A rise in the price of oil also helps keep the risk of a resurgence of inflation on the agenda.

• The market may be pricing in higher rate volatility, requiring real and nominal rates to rise. This was suggested to us by Payden & Rygel’s Jim Sarni, who wrote that “it’s volatile nominal yields that are to blame, as opposed to any deep, dark theory about real rates. . . This performance volatility is expected. . . in the periods immediately following a large movement in rates.”

These explanations are not mutually exclusive. But we like the third explanation better, as it incorporates the view that we are in a particularly uncertain time for rates, as the Federal Reserve changes policy direction and the various impacts of the pandemic continue to fade (each moment is feels particularly uncertain while you’re living it, but we’d say this one really is.) It is worth noting that the Move index of bond implied volatility does not show an upward trend. But that may be because the index looks at one-month options on various Treasury maturities, and the market is taking a somewhat longer view.

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