Labor side of dual mandate this week
December 1, 2024 – Weekly comment
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Yields plunged last week. I marked 5’s down 21.3 bps to 4.073%, 10s down 21.4 to 4.192% and 30s -21.6 to 4.378%. On the SOFR strip, every contract from SFRM6 to SFRM8 was up 21 to 21.5 bps. The prices: SFRM6= 9633.5 or 3.665% to a high on the strip of 9641 for U7, Z7 and H8 (3.59%). SFRM8 settled 9640.5 or 3.595%.
The big news items revolve around Bessent as choice for Treasury Sec’y, Tariffs with a capital T, and DOGE. Are yields declining because money is flooding into the US? DXY actually fell by 1.7% this week, but that was just a small retrace of the surge since October. The equation for GDP is C + I + G + (X-M). Consumption plus Investment plus Government plus (Exports minus Imports). G appears poised to fall. (X-M) is also at risk. A change in the composition of national income could easily make the Fed sit on their hands, to see how things shake out. According to the St Louis Fed site, Federal Net Outlays as % of GDP were 22.1% as of 2023. From 1992 to 2008 that number was 21% or lower, with a low of 17.5% in 2000.
Marc Andreesen was on Rogan and said that half of federal government workers have never returned to the office. (I have no idea if true). He said there’s one agency, where the union representing Federal Employees negotiated a deal that employees are required to come to the office just one day each month, so employees come in on the last day of the month and first day of the next month…2 days in 60 days…many have moved to cheaper locales. “DOGE announced you can work from home, just not for the Federal Gov’t.”
Or are yields declining because of generally softening conditions?
News this week includes ISM Mfg Monday. JOLTS on Tuesday, expected 7470k from 7443k. ADP Wednesday along with ISM Services. Beige book in the afternoon. Payrolls on Friday, expected 200k from 12k.
JOLTS has trended lower since the peak 12182 in March 2022. Last month’s 7443 was the lowest since early 2021 and is below the pre-pandemic level of early 2019. NFP at 12k last month was also lowest since Covid. The unemployment rate has been 4% or lower from late 2021 to June of this year. Now 4.1% with a recent high of 4.3%. Expected at 4.1 on Friday.
Having had a strong rally from end-of-June (-50) to end-of-September just after the Fed’s 50 bp ease (+22), 2/10 treasury spread has pulled back to 1.3 bps. Not exactly foreshadowing a restrictive Fed, but not loose either. The astounding 46% rally in the KRE regional bank index from late June to this week could easily see a pullback if the curve re-inverts. The positive aspect of lower regulation may collide with stingier liquidity from the Fed. From the Fed minutes last week: “A few participants discussed vulnerabilities posed by the growth of private credit and potential links to banks and other financial institutions.” Having missed SVB, perhaps the Fed will lean against the idea of a softer regulatory environment.
Putin last week:
Energy resources on the US market in some states are 3-5 times cheaper than in Europe and Germany. Entire enterprises, entire industries are shutting down in Germany and moving to the US. And they do it purposefully. But Americans are pragmatic people. Actually maybe they do the right thing in their own interests. But these [Germans/Europeans] it seems that if they’re told “we will hang you” they will have just one question “Should we bring the rope ourselves or you will give us one?” That’s it. So VW is shutting down, metallurgical companies are shutting down, chemical companies are shutting down, glass companies are shutting down. Hundreds or even thousands of people are being thrown out onto the streets.
The German bund ended the week at 2.09%, having been as high as 2.445% on Nov 7. Since the very beginning of 2024, this is the lowest yield apart from a spike down to 2.036% on October 1. Chart shows German bund, China 10y and Japan 20y, all closing in on 2%.
OTHER THOUGHTS/ TRADES
Below is a chart of the green SOFR pack, three years forward. Currently, it’s the average of SFRZ6, H7, M7 and U7. Level is 9639.375 or right around 3.6%. Yellow line is midpoint of FF target range.
In the past couple of years greens have surged three times to 9700 or above, ~3%. Each move was followed by unwinding over several months, to 4% or a bit higher. The market is currently near the midpoint, weighing fears of a slower labor market vs a growth spurt due to relaxed regulation/taxes, overlaid with concerns about massive debt issuance. The trend into year-end seems to support higher prices, lower yields. Friday’s data could have a large impact.
| 11/22/2024 | 11/29/2024 | chg | ||
| UST 2Y | 434.4 | 417.0 | -17.4 | |
| UST 5Y | 428.6 | 407.3 | -21.3 | |
| UST 10Y | 440.6 | 419.2 | -21.4 | |
| UST 30Y | 459.4 | 437.8 | -21.6 | |
| GERM 2Y | 199.1 | 195.7 | -3.4 | |
| GERM 10Y | 224.2 | 209.5 | -14.7 | |
| JPN 20Y | 189.0 | 185.2 | -3.8 | |
| CHINA 10Y | 208.0 | 203.3 | -4.7 | |
| SOFR Z4/Z5 | -51.0 | -63.3 | -12.3 | |
| SOFR Z5/Z6 | -12.5 | -17.0 | -4.5 | |
| SOFR Z6/Z7 | -3.5 | -4.0 | -0.5 | |
| EUR | 104.18 | 105.82 | 1.64 | |
| CRUDE (CLF5) | 71.24 | 68.00 | -3.24 | |
| SPX | 5969.34 | 6032.38 | 63.04 | 1.1% |
| VIX | 15.24 | 13.51 | -1.73 | |
| MOVE | 99.14 | 97.74 | -1.40 | |
