For the second month in a row the non-farm payroll and the household employment reports have diverged. The establishment survey came in at less than half of consensus expectation at 199,000 new jobs, while the household measure registered 651,000 new jobs for the month. That measure was enough to push the unemployment rate down to 3.9%, and just above the post-financial crisis low of 3.5%. That comes on the back of the surprisingly hawkish minutes of the December 15th FOMC meeting. Not only did the minutes solidly indicate a March rise in Fed Funds, the committee apparently had a meaningful discussion on the appropriate size of the Fed balance sheet under normal circumstances. That discussion included how fast they would allow a runoff of maturing securities. The minutes failed to detail a targeted amount, but it’s certainly well below the current balance of $8.2 trillion. They did indicate that a “substantial buffer” is the likely target. Also, some participants favor a complete runoff of the Fed’s mortgage-backed holdings in favor of Treasury debt. That last point could become problematic in a rising rate environment. Mortgage-backed securities are negatively convex, which is to say that as interest rates rise the duration extends. In a rising interest rate environment home owners are less likely to refinance and the pace of maturing MBS would slow, perhaps materially.

Wednesday November 10th provided a proverbial “gut punch” to the capital markets. The day started with the inflation report for October that was way above expectations and was capped with a 30-year bond auction that was an absolute disaster.  Year-over-year CPI came in at 6.2% versus the 5.4% registered last month.  Fed Chairman Powell continues to believe that the uptick in inflation is going to pass but it’s not happening, and people are not happy about it. 

August proved to be the quietest month of an unusually quiet summer.  The 10-year Treasury Note had a 13 basis point range for the period.  The supposed highlight of the month was to be Chairman Powell’s comments to the virtual Jackson Hole Central Bank meeting on the last Friday of the month.  Despite a cadre of Central Bankers calling for an immediate halt to the open market purchases, the Chairman fell short of that mandate, saying the Open Market Committee is likely to commence tapering before the end of 2021.

Market volatility continued in June as investors expressed relief that much of the Covid-mandated restrictions had been lifted while simultaneously worrying that the more serious Delta variation could possibly force the population back into quarantine.  While the latter caused an occasional plunge in stock prices, the corrections have been short lived as long bond yields have steadily fallen, with the 30-year note below 2.00% at the time of this writing.

After three consecutive months of rising 10-year interest rates, the benchmark note yield drifted lower in April ending the month at 1.62%.  To put that into perspective, the 10-year rate bottomed last summer at 0.50%.   The move higher has been driven by the easing of COVID-related restrictions, the resultant strong rebound in economic activity, excessively easy monetary policy and the concern that the fiscal stimulus passed by Washington will result in higher inflation.