Investors Start the Year in a Tentative Mood

Investors Start the Year in a Tentative Mood

• The second business day of the year brings more selling across the Treasury curve as some of the sharp rally in November and December is partially reversed. Upcoming Treasury supply next week is also working against better bids, as investors start the new year in a tentative frame of mind. Presently, the 10yr note is yielding 3.99%, down 17/32nds in price while the 2yr is yielding 4.36%, down 2/32nds in price.

• After a period of quiet during the holidays, the action picks up this week and is even more compressed given the Monday holiday. This morning’s ISM Manufacturing will be the first December data with expectations that the sector remains in contractionary territory but with slight improvement from November’s 46.7 print to an expected 47.1. As is the case lately, the prices paid, employment, and new order sub-indices will get attention as investors look for the latest trends in inflation and jobs.

• Also, later this morning is the Job Openings and Labor Turnover Survey for November. Openings have been trending lower for nearly a year but the expectation for today is for openings to tick up to 8.821 million vs. 8.733 million in October.  Openings peaked at 12.027 million last March so you can see the extent of the slowing since then. However, pre-pandemic openings were in the 7 million range, so not exactly a real weakening, more an unwinding of some of the extreme labor tightness that characterized the post-lockdown recovery.

• The Fed minutes will be released this afternoon, and with all the pushback from Fed speakers after the perceived dovish pivot by Powell they should make for interesting reading to see firsthand how the discussions around future policy actions transpired. While Powell mentioned that rate cuts were part of the discussions, some other Fed officials said it was more around the updated dot plot forecasts. Anyway, perhaps the minutes will shed more light on the subject.

• The big report comes on Friday with the December BLS payrolls numbers. Expectations are for 170 thousand new jobs vs. 199 thousand in November.  The unemployment rate is expected to tick up to 3.8% vs. 3.7% the prior month. Average hourly wages are expected to increase 0.3% MoM with the YoY rate dipping to 3.9% vs. 4.0% in November. While the report isn’t likely to shift any rate decision for the January 31 FOMC meeting, it could begin to push back on the market’s rate-cutting odds for the March meeting. Right now, those odds are over 70% for a cut (See table below).

• Finally, there seems to be two schools of thought over the source of the so-called immaculate disinflation that we experienced in 2023. While the Fed is not taking a victory lap yet, they may tell you that the 500+bps in rate hikes certainly played a role in curbing demand and will continue to do so. While the residential real estate market and the ancillary businesses have certainly been impacted, consumer consumption really hasn’t slowed much in the past year. The other school of thought is that the lockdown-inspired supply constraints have largely been repaired/recovered such that supply has risen to meet demand in most sectors and alleviated most of the price pressures, regardless of interest rates. If those higher rates really weren’t that impactful to slowing inflation, perhaps the Fed will be quicker to cut if those higher rates do negatively impact the labor market and economy.  It’s an interesting proposition and one the market seems to think will happen.