Long-term US Treasury yields rose last week as investors digested mixed economic data that reinforced the idea of a “Goldilocks” economy — not too hot to require the Fed to pause/hike rates, not too cold to signal an imminent recession.
The Bureau of Labor Statistics (BLS)’s September jobs report released on Friday exceeded expectations. Nonfarm payrolls increased by 254k jobs, well above the 159k expected, with positive revisions in each of the past two months. The unemployment rate cooled to 4.1% — better than expected – and job openings (JOLTS) stood at 8 million (vs. 7.7 million expected), signaling that jobs are still plentiful. Although job growth has cooled from the heady gains of the past two years, the job market remains robust enough to avoid raising recession alarms.
The ISM Services Purchasing Managers’ Index (PMI) release from Thursday also suggests a continued economic expansion. September’s ISM Services PMI came in at 54.9, an improvement from the prior month’s 51.5 and better than expectations of 51.7. While the ISM employment survey results were weaker in both ISM Services and Manufacturing, they were overshadowed by strong labor data from the BLS.
The combination of resurgent labor data and market pricing of a dovish Fed pushed Treasury yields higher last week, with the 10-year yield approaching 4%, among the highest levels since the onset of growth fears in late July. This is reflective of growing investor expectations that despite the outsized Fed cut in September, economic data may not warrant continued aggressive Fed action at the November and December meetings.
A moderate economic expansion and an accommodative Fed is supportive of risk assets like equities, investment grade corporates, and high yield bonds, as the “Fed Put” limits the downside risk while risk assets continue to benefit if the economy is healthy. Corporate credit spreads are now at the lowest point of the year as investors price out the risk of default in a world of central bank easing and a lack of major economic recessions.
The resilience of the labor market supports the notion of a “Goldilocks” economy — steady job creation and solid economic growth without the runaway inflation in the near term that could cause the Federal Reserve to pause or reverse its rate cuts. In the context of the current cutting cycle, this stability is especially favorable for asset markets as it allows the Fed to continue its rate reductions without having to deal with an imminent recession. The Fed’s ongoing cuts signal a supportive monetary policy stance, reinforcing the “Fed put” — the idea that the central bank will act to support markets, particularly in times of economic uncertainty, let alone in an environment where the economy remains in a solid expansion.
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