Markets Continue to React Dramatically to Soft Jobs Report

Markets Continue to React Dramatically to Soft Jobs Report

• Treasury yields are lower again this morning as the rout in equities from Friday’s soft jobs report continues this morning and is spreading globally. The moves are nearing historic levels and are prompting calls from some quarters for the Fed to employ an emergency cut, but the latest Fed speak from Austin Goolsbee this morning indicates the Fed is far from going in that direction (more on that below). The moves have, however, just about un-inverted the yield curve (see graph below) and odds of multiple 50bps rate cuts are increasing. Given the magnitude of the moves we’ve included a plethora of graphs to help digest some of the moves (a picture is worth a thousand words). Currently, the 10yr note is yielding 3.74%, down 5bps on the day while the 2yr is yielding 3.82%, down 4bps on the day.

• The repricing in financial markets off the soft jobs report continues today, and it may persist for some time, so keep your heads low as the bullets continue to fly. It’s a shoot first ask questions later market. Volatility has obviously soared in response to the soft jobs report and the resulting selling that has spread globally (see graph below). As you can see, it’s nearing levels that happened in past recessions.

• The pop in the unemployment rate has also triggered the Sahm Rule that predicts a recession as the three-month average of the unemployment rate moved 50bps above the three-month average of the 12-month low. Claudia Sahm has cautioned, however, to take the current reading with a grain of salt as a big part of the recent uptick in the unemployment rate stems from an increase in the labor force rather than an increase in layoffs.  Just something to consider; that and the Atlanta Fed’s GDPNow model sees third quarter GDP at 2.5%, hardly recessionary territory.

• Obviously, Fed speak will be important this week, but we already received a preview in what we’re likely to hear from Chicago Fed President Austin Goolsbee on CNBC this morning. He certainly didn’t indicate the Fed is considering an inter-meeting cut or a 50bps cut in September. He fell back on the jobs report as being “one number” and that is probably the rhetoric we’ll hear from others as Goolsbee is one of the more dovish members. Now, if financial market dislocations become severe and liquidity issues develop, the sense of urgency will amp up. For now, it looks like the Fed wants to remain in watch and wait mode.

• The Fed will get inflation numbers next week in the form of CPI and PPI for July, but it seems now it would take a big miss to the upside to derail a September cut, and even that may not be enough. The full employment mandate has moved front and center at this point.

• Meanwhile, the ISM Services Index beat expectations rising from 48.8 to 51.4, beating the 51.0 expectation.  Recall, it was a weak ISM Manufacturing Index last week that really set in motion the flight to safety trades and fears of a rapidly slowing economy. The employment index rose from 46.1 to 51.1 and new orders rose to 52.4 from 47.3. A decidedly strong read on the services sector that should soften some of the recession angst from the jobs report.

• Finally, the Fed probably has some regret they didn’t get on with a rate cut at last week’s meeting and that will likely push the hawkish camp to the back in favor of those that were arguing for a cut, just as the dovish camp got pushed to the side when they continued to argue against rate hikes in early 2022. Expect a shift in tone as a result, although Goolsbee wasn’t willing to open the bidding on that this morning with the “just one number” comment.  Although, he knows, in all honesty, there have been several recent reports building a case for a softening in the economy.

Remember that 2yr – 10yr Yield Curve Inversion? Not so Much Anymore

Source: Bloomberg