Friday’s jobs report may have placed a temporary speed bump in front of the Treasury rally, but this is looking more and more like a market that’s being driven by bonds, not stocks. The November non-farm payroll report wasn’t even that good when you dig into it. The headline number topped expectations, but when you consider that 1 in 4 of those workers were people coming back from the UAW and SAG/AFTRA strikes, we likely would have had a below forecast number. The October jobs report saw no revision, but the September report was revised downward by 35,000 (something that shouldn’t be surprising if you read my macro piece earlier this week). None of this will be enough to give the markets the impression that the labor market is cracking, but it could put an adjustment into interest rate expectations.
While the recent rally in long bonds has been powerful, there’s a pretty good possibility that it’s gotten overdone in the short-term. Expectations have moderated somewhat now, but earlier this week the Fed Funds futures market was pricing in about a 45% chance of 6 quarter-point rate cuts by the end of 2024. I know investors are anticipating rate cuts sooner than later, but that seems a bit overoptimistic. Right now, I think there’s a major disconnect between what the Fed will do and what the market thinks the Fed will do. Perhaps we’re in for a half dozen rate hikes over the next 12 months. Conditions change quickly and this could happen, but is there sufficient reason to believe based on what we know right now that this is a likelihood? Is the Fed really in a position to make such a sharp pivot when the economy is still adding 200,000 jobs a month, core inflation is still at 4% and wage growth is running at more than 4%? If the market decides that the answer to that question is no, I think you’ve got a catalyst for a major correction in both stocks and bonds. The question would be on the duration side or the credit side (triggering a flight-to-safety into Treasuries as credit spreads widen).
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