Jobs Report Upends Rate Cut Narrative… “No Landing” Scenario Spikes Yields
Last Friday’s “blowout” jobs report upended expectation that the Fed’s aggressive cutting would continue. Although fear of a weakening labor market is now the main driver of the Fed’s rate policy, the strong labor market removes the sense of urgency signaled by last month’s 50 bp cut. Non-farm payrolls jumped 254,000 with the unemployment rate dropping to 4.1% (remember the Fed’s dot plot of rate cuts also included predictions of 4.4% unemployment this year). Note that the job gains were not widespread throughout the economy; they were concentrated in a few industry categories (travel and leisure, etc.).
The 10-year Treasury jumped from 3.61% pre report to over 3.81% by the next trading day and is now at 4.10%. November Fed meeting futures markets “reversed” as probabilities for a 50 bp cut dropped from 40% to zero and the possibility of no cut went from zero to 30%. A brand-new narrative has taken hold: “no landing.” Instead of wondering if a hard (recession) or soft (no recession) landing was in the cards, inflation is brought under control in either scenario. “No landing” envisions inflation possibly reigniting, which would delay Fed cuts.
Fed officials this week remarked that rate cuts should continue, but they stressed being “data dependent” with Atlanta President Bostic indicating he is open to a “pause” in rate cuts. The uncertainty caused the markets to have “buyer remorse” regarding the recent treasury rally. Some analysts are referring to the Fed’s 50 bp September cut as a “mistake.”
Today’s CPI report indicated a 2.4% rise in September, the lowest since early 2021, but above market expectations. Slow progress is being made towards 2% with volatility in several categories. Bright spot: Shelter costs grew more slowly, a large part of the index that has been slow to move. Today also saw an increase in weekly jobless claims (14 month high), but that could be distorted due to Boeing strike and hurricane Helene effects. Markets will continue to reset expectations and watch the data. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.