As we wrote last week, the tone of Chairman Powell’s comments during the post-FOMC press conference left observers with the sense that the Fed was close to a peak in the overnight rate. That view was immediately undone on Friday when the BLS reported that 517,000 jobs were added to the economy in January. Certainly not the outcome expected of an economy teetering on the brink of recession. To counter Powell’s comments, Fed speakers this week resounded their hawkishness. The “jawboning” worked with the 2-year note rising 40 basis points from last week’s low yield. The 30-year yield also rose, but by about half of the 2-year move. The overnight/30-year spread remains inverted and is closing the week at about -80 basis points. As we’ve mentioned before, an inverted yield curve has a negative cost of carry for levered investors. The risk is that those investors tire of the expense and exit the trade causing long rates to rise. Effectively, it’s the inverse of a short squeeze. That realization may have played a role in the disastrous 30-year auction on Thursday. Treasury notes and bonds trade on a when-issued basis for a number of days prior to being auctioned. The practice is useful in that it gives investors a strong idea of the yield level at which the new issue will clear. Yesterday’s 30-year auction had a 3.2 basis point tail. That was a disastrous outcome and equated to about a half point repricing on the bonds bought just before auction.

We thought the lead story for this week was going to be the less hawkish, post-FOMC press conference, but in fact it’s the January employment report. Economists had been forecasting that the economy would add 188,000 jobs in January and the unemployment rate would tick up to 3.6%. Given the increasing number of layoff announcements since December, we thought the actual release would have been about half of the expectation. Instead, the economy generated a staggering 517,000 new jobs during the month and the unemployment rate ticked down to 3.4%. There was no weakness in any of the subcomponents and, to be honest, the report was bewildering.

Though it was a holiday shortened week in the U.S., there was plenty of action in the markets. The most significant market-moving news was the Retail Sales report for December. Recall that November retail sales were disappointing, worrying analysts that the holiday selling season was going to be a bust. That worry proved prescient! Retail sales for November were revised down from -0.6% to -1.0% from the October level. On Wednesday the government reported that December retail sales fell -1.1% from the revised November figure. Parsing through the details, the weakness was broad-based, with sales at department stores falling a shocking 6.6% from November’s level.

Today’s bond market action is not what one would expect given the release of the December jobs report. The report showed the economy created 223,000 new jobs, again exceeding the 203,000 that was expected. Parsing further through the report, the unemployment rate fell to 3.5%, a record low, and the participation rate increased, meaning that more people joined the workforce and even more of them found work. At first glance, this is not the outcome that the Fed was hoping for. They are trying to cool the economy and the employment situation is actually further heating it up. But bond traders chose instead to focus on the Institute for Supply Management (ISM) Services survey.