5/3/24 – Slower than expected job growth lifts bond prices
Investors began this week with much trepidation, given the mixed economic data and stubbornly high inflation that has characterized the first four months of this year. It was widely expected that Powell would offer a “mea culpa” for suggesting that rate cuts were imminent back in December. He didn’t go quite that far but did opine that the committee was “less confident” that inflation would fall to 2% in the near term. But he also cast doubt on the possibility that the next move in interest rates would be a hike.
Given the wide dispersion in economic data this week, the committee’s decision to keep the overnight rate unchanged and refrain from speculating on the next move was a wise one. The Conference Board’s consumer confidence index plunged, falling from 110.9 in January to 97.0 in April. Also, surprising sharply to the downside, the JOLTS job openings measure plunged to 8.48 million vacancies, well off the 12 million open and unfilled jobs registered just 13 months ago. Continuing with the weaker than expected data, the employment report for April showed that 175,000 new jobs were added for the month, below the expectation of 240,000 and the unemployment rate ticked up to 3.9%. Arguably, however, that’s not a bad outcome for the economy. Employment has been growing above trend for several months and that is not good for sustainability. That torrid growth likely contributed to the 4.7% jump in unit labor costs in the first quarter.
Based on the totality of data this week, the economy appears to be coming in for a soft landing. That possibility seems to have emboldened speculators to again price-in an overnight rate cut of 25 basis points later this year. Similarly, the 2-year note is closing the week at 4.81%, 19 basis points lower than last Friday’s close.
Accompanying the FOMC statement was the notice that the Fed intends to reduce the roll-off of their investment portfolio. Currently they allow $60 billion a month of their portfolio to mature without being reinvested. That monthly reinvestment of maturing issues will be reduced to $25 billion per month. As the portfolio has declined from approximately $9 trillion to the current $6.7 trillion, they seem to have concluded that they can slow the pace. We note that the change is a net easing of monetary policy as it means less of new issue Treasury’s needs to be absorbed by investors.
After the barrage of economic data this week, investors will be given a reprieve as very little data will be forthcoming next week.
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