6/2/23 – Back to Fundamentals

The best news of the week is that the debt ceiling issue has been resolved, at least until January 2025.  The news eased investors fear that a default by the U.S. government would collapse the entire financial system.  We won’t have to worry about that again for another 18 months.  As expected, the default premium investors built into the front end of the bill curve has entirely vanished and nearby bills are trading near 5% – off the high of 7% touched just two weeks ago.

Now we can get back to fundamentals, which have turned decidedly murky.  Last week we wrote that unless the employment report was a blockbuster, Chairman Powell would not be dissuaded from holding the overnight rate unchanged at the June meeting.  As it came to pass, the employment report was a blockbuster!  According to the BLS, the economy added 339,000 new jobs in May, far exceeding the 195,000 gain expected.  Equally surprising, the previous month’s tally was revised higher by 42,000 more jobs.  In addition, the ADP private jobs measurement showed an increase of 278,000 jobs for the month and JOLTS, the job opening measure ticked back over 10 million after falling below that level over the last two months.  This morning’s employment report was not all good news though.  Household employment actually fell by 310,000 jobs in May.  We caution that the measure is much more volatile than the BLS report and given the upside in ADP and job openings, as well as the drop in weekly claims for unemployment insurance, we are taking the reported drop as an aberration.

That makes the call on the Fed pause more challenging.  The hawks could legitimately argue that the economy is actually reaccelerating, though after 500 basis points of rate hikes that’s hard to imagine.  Due to calendar timing, the May CPI report will be released on the morning of the of the first day of the two-day committee meeting.  It’s expected to continue to ease lower but it’s not clear how that will persuade the committee.  From our perspective they’ve backed themselves into a pause but at this point the odds of a pause are probably 50/50.

With the debt ceiling out of the way and the Treasury coffers nearly empty, the Treasury Department is hitting the market with a new issue vengeance.  Today they issued a $15 billion in cash management bills, and $173 billion of 3-month, 6-month bills and off the run cash management bills.  We be watching closely to see how the secondary market reacts.  As we’ve written on several occasions the Treasury Bill market has been quite volatile as investors try to guess the near-term implications of government policy.  That is likely to be the highlight next week as the economic calendar is fairly light.