PCE Data Barely Moves Markets as Jobs Report and Election Loom…Oil and Bond “Divergence” Could Point to Term Premium
This week’s data has been mixed with some signs of “slight cooling” as all eyes focus on tomorrow’s monthly jobs report and next week’s US election. Tuesday’s job openings report indicated 7.4 million job openings at the end of September, the lowest level since January 2021. The jobs market seems to be “normalizing” to pre-pandemic conditions with the “quits rate” down below 2.0%, consistent with the drop in job openings. Today’s PCE report was pretty much in line with expectations, with the headline at 2.1% (0.2% monthly) and core at 2.7% (0.3% monthly). Goods prices rose 0.1% while services increased by 0.3%. The last print at 2% (the Fed target) was in February 2021, as pandemic stimulus and supply chain issues took hold. With the Fed’s focus on jobs lately, tomorrow’s monthly employment report looms large as the Fed focuses on the jobs market. The unemployment rate is expected to hold at 4.1%, with a very low job creation figure of 110,000 in the wake of labor strike and storm disruptions. Election uncertainty: markets often consider “divided vs unified” government for any big policy changes. If one party gains control of the Presidency, the Senate, and the House, major policy changes could be in order. The wide range of possible scenarios in the wake of election day are contributing to tension and uncertainty. Fed Futures markets indicate a near total probability of a 25 bp rate cut at next Thursday’s meeting.
Speaking of prices, oil prices have eased lately as tensions in the middle east have not resulted (yet) in major conflict and supply disruptions. Usually, bond yields move with oil price fluctuations as energy costs reverberate throughout the consumer economy. Oil price fluctuations are seen as a harbinger of near-term inflation. The recent divergence has been dramatic. The Fed cut 50 bps on September 18, oil prices have fallen since then. However, the 10-year Treasury has spiked about 70 basis points during the oil price drop. In fact, Monday saw crude drop over 5% while the 10-year Treasury hit a 4 month high of 4.30%. It’s noteworthy that the rising yields coincided with a week of big debt issuance. This could be signs of the markets requiring a “term premium” for longer-dated treasuries due to concerns about prolonged budget deficits in the US. Apollo’s Torsten Slok remarked that “term premium [reflects] the willingness of investors to lend money to the U.S. government over the next 10 years. If that goes up (as it is doing at the moment) then it tells us that investors are getting more worried about fiscal sustainability.” France and England are seeing the return of the “bond vigilantes” as buyers demand higher yields for nations running large deficits in relation to their GDP. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.
