Trading this week was dominated by Chairman Powell’s sudden hawkishness and the November jobs report.  The headline nonfarm payrolls came in well below expectation, registering 210,000 new jobs versus consensus expectation of 531,000.  That statistic is based on a survey of businesses.  The Bureau of Labor also releases an employment measure based on a survey of households and that measure showed a gain of 1.1 million new jobs in the month, significantly above expectations and the polar opposite of the nonfarm farm result.  Moreover, the household report showed that 594,000 persons reentered the workforce and, as a result, the unemployment rate fell to 4.2%, down from 6.3% in January of this year and well below the 14.8% rate registered in April 2020. 

At the press conference following the last FOMC meeting, chairman Powell described the employment recovery as incomplete, leaving market participants to conclude that the then just decided directive to taper open market purchases would be the modus operandi, at least for the foreseeable future.  We call that interpretation into question with today’s comments by Vice Chairman Richard Clarida and Fed Governor Chris Waller.  In separate speeches they both communicated that the Fed may need to discuss speeding up to pace of taper at the meeting in December. 

The dour mood bond buyers have been in since early August reversed itself in a bout of short covering this week, with an especially sharp move on Wednesday.  On that day alone, the 10-year Treasury note plunged 9 basis points.  The fall in yield occurred despite mostly better than expected economic data, and was highlighted by an outstanding 5-year note auction.  Bucking the trend of weaker, tailing auctions, the $61 billion 5-year note cleared 2.5 basis points below the at-auction yield.  Moreover, Primary Dealers bought 17.9% of the auctioned amount, the third lowest result since 2004.  The momentum was enough to carry the 30-year note below 2.00% for the first time since early September.  That’s not to imply that we’ve turned bullish on the bond market.  To the contrary, we think the price action this week was simply supply and demand coming back into balance after several bearish months.

There was much to analyze this week with inflation coming in higher than expected and retail sales surprising to the upside. Equities once again pulled themselves off the mat and appear poised to go at least a few more rounds with greedy and fearful investors. Less obvious but quite telling is the yield curve flattening that took place. The spread between the 2-year note and the 30-year bond has flattened 18 basis points since last Friday. That’s a meaningful move and hints that investors are starting to position for a sooner than advertised interest rate hike.