Treasuries Rally as Data Points to Possible Jobs Market “Inflection”   

San Francisco Fed President, Mary Daly, warned that the US labor market is reaching an “inflection point.” She described the labor market as “good” but no longer “frothy.” Chicago Fed President, Austan Goolsbee, sees “warning signs” of weakening and warning that the Fed’s “dual mandate” is to lower inflation WITHOUT stressing the labor market. Note that Goolsbee also commented that the Dec/Jan inflation readings were a “bump in the road” and “we’ve gotten a string of improved inflation readings.”

Today’s jobs data offers more evidence of a cooling employment market. ADP employment showed 150,000 gain in private sector jobs (vs expectations of 161,000). More “survey controversy” – ADP revised their May report to 157,000 jobs gained, based on actual payroll data. However, the official BLS data reported a 229,000 gain in private sector jobs in May. Also, new jobless claims rose to 238,000 with the 4 week average climbing to 238,500 (the highest in 9 months). The ISM services index fell to 48.8 (down from 53.8). Note that it would have dropped even further had it not been for the still hot leisure and hospitality sector.

Fed Minutes from last month’s meeting along with comments from Fed Chair Powell show a slightly dovish and hyper data dependent Fed. Powell, “We’re getting back on a disinflationary path” and the Fed has made “quite a bit of progress.” The Fed minutes also indicated policy makers taking note of the “K shaped” recovery (upper class still spending, but lower class feeling the squeeze). “A few participants remarked that spending by some higher-income households was likely being bolstered by increasing asset prices,” the Fed minutes said. However, “many participants observed that, in contrast, lower- and moderate-income households were encountering increasing strains as they attempted to meet higher living costs after having largely run down savings accumulated during the pandemic.” The push-pull of inflation and employment is coming into focus amongst officials. Some noted a risk that the cooler labor market could give way to “an increased pace of layoffs.” The 10-year Treasury rallied on the “bad news is good news” contrarian trade – down to 4.35% from a high this week of 4.50%. Friday’s big jobs report will be closely watched for “survey anomalies” and more. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.