A Tentative Calm Returns to the Markets

A Tentative Calm Returns to the Markets

• Treasury yields continue to drift higher this morning as the lack of new recession-related catalysts, and reduced volatility, contribute to a much calmer market than was the case on Friday and Monday. The lack of potential market-moving data today should hopefully continue the trend. Currently, the 10yr note is yielding 3.94%, up 6bps on the day while the 2yr is yielding 4.02%, up 4bps on the day.

• The calm that started to settle over markets yesterday continues today, and with a light data calendar we expect/hope for another quiet day. The one item of note is a 10yr Treasury auction this afternoon, and with yields up 25-30bps from the intra-day lows on Monday that should entice enough buyers to provide for a decent auction. That said, the securities will still be sold at the lowest yields in a year, so the auction stats will provide for some interesting reading.

• The recession fears that gripped markets on Friday and early Monday were slightly soothed with the better-than-expected ISM Services report and the Trade Balance report yesterday saw an increase in both exports and imports which hardly hints at a recession either. With that said, markets will be attuned to any further hints of weakness with the reaction probably being asymmetric. That is, any hints of weakness will prompt more of a reaction versus reports that don’t stick to that narrative, at least while emotions remain on edge.

• The next item that will garner plenty of attention will be the weekly jobless claims numbers tomorrow. Expectations are for claims to decrease slightly from 249 thousand to 243 thousand, which is still elevated from prior levels but certainly any step back will be appreciated. Continuing claims are expected to remain nearly unchanged at 1.876 million vs. 1.877 million the prior week. That level represented the highest total since November 2021 (see graph below). Obviously, any upside miss here will provide further fuel for recession fears.

• We mentioned on Monday that the increase in the unemployment rate to 4.3% triggered the Sahm Rule that says a 50bps increase in the three-month average from the three-month average of the 12-month low indicates recessionary conditions. The caveat here is that Claudia Sahm herself has cautioned, that like many other recession indicators in this pandemic-driven cycle, it may not be conclusive. The recent uptick in unemployment has come more from people entering the labor force and not finding immediate work rather than an increase in layoffs. That slowdown in hiring was a feature of Friday’s employment report. The report generally found hiring momentum had slowed while layoffs remained mild. Obviously, if jobless claims continue higher that will signal that labor market weakness is entering a more precarious stage; thus, the weekly jobless claims reports will get heightened scrutiny going forward.

• We’ll add another item from the employment report that hasn’t received a lot of attention. The BLS explicitly noted that Hurricane Beryl, which made landfall near Houston during the employment survey week (July 8), didn’t impact data collection or results. We’ll add, however, that the Establishment Survey response rate fell to 56.9%, the lowest since July 2001, and well below the 10yr average of 74%. In addition, 436 thousand people were unable to work due to adverse weather in July when the average for the month is 32 thousand. That seems to us to be something to consider. At the very least, expect the revisions in the August report to garner plenty of attention.

Continuing Jobless Claims at 3yr High