Halyard’s Weekly Wrap – 2/2/24 – Solid employment report forces Bond traders to rethink timing and magnitude of rate cuts.
The January employment report was nothing short of a shocker. The estimate was for 185,000 new jobs, and the whisper was closer to 125,000 after the Wednesday release of the ADP report showing a gain of only 107,000 jobs. Instead, the BLS reported that 353,000 new jobs were created in January and the jobs figure for December was revised up to 317,000. Collective thinking prior to Friday had been that the Fed had gone too far with their rate hikes and the U.S. was teetering on the verge of a recession. To be clear, that was not our opinion. Retailers enjoyed a strong holiday selling season, consumer confidence has bounced back, the unemployment rate is close to an all-time low, and the S&P 500 just hit an all-time high. With the employment report the expectation that the Fed will cut rates in March has been obliterated. In fact, the Fed shouldn’t be considering a rate cut anytime soon. If anything, the 4.5% year-over-year rise in average hourly income is likely to contribute further to the inflationary uptick.
One must wonder if the FOMC were privy to the report when they met on Wednesday. The meeting was expected to be a “yawner,” but instead the language in the minutes were much more hawkish than was expected. At the December meeting, the FOMC indicated that they expected 3 rate cuts this year and Fed watchers were speculating that the first of those cuts would come at the March meeting. Powell slammed the door on that with his comment that the committee needs to see more evidence that the recent drop in inflation is sustainable, and he said he was not yet confident was true.
One unexpected bright spot this week came on Monday when the Treasury announced their borrowing needs for the quarter. The projection had been that they would need to tap the market for $816 billion in the first quarter. Instead, they announced that their borrowing need would be closer to $750 billion, significantly less than was forecast. They cited a “modest improvement” in fiscal flows, meaning greater than expected tax revenue. The initial response to the news was a drop in interest rates across the curve, as less borrowing translates to less supply. But that move was undone by this morning’s report as the 2-year/30-year curve reinverted.
The calendar for economic releases next week is light but we expect that as investors reassess their expectations for interest rates, volatility will continue in the market.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.