Payrolls
October 4, 2024
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–Service ISM stronger than expected at 54.9 versus 51.5 last. Yields rose, with rate contracts closing at new lows, wiping out all gains made since the last employment report. For example, SFRH6, the peak SOFR contract, settled 9696, the first settlement below 9700 since 3-Sept. The high settle was 9723, a couple of days after the last NFP. Price action is bearish. Ten year yield rose 5.5 bps to 3.948%. The question becomes: Is a possible trend change due to Powell cooling off easing expectations? Is it due to renewed strength in the economy? Or is it a more insidious and pervasive recognition that reckless spending policies could rekindle inflation and resurrect bond vigilantes. Druckenmiller has taken the reins, saying he’s short bonds, but doesn’t know the timing. “Bipartisan fiscal recklessness is on the horizon.” [It’s not only on the horizon, it’s been a feature for years]. He said his ex-boss [Soros] “would be embarrassed” of him failing to make a bigger short bet on U.S. bonds, as he suggested inflation could now surge to levels last seen in the 1970s. (marketwatch.com)
–I mentioned the ten-year breakeven (10y minus tip yield) yesterday, and it edged to another slight new high at 221 bps. Not dramatic, but persistent. Treasury vol was flat to a bit softer, so there’s no real sense of panic despite closing on the lows, but we do have NFP today and 10, 30 year auctions next week. My guess is that a weak NFP will lead to a rally in TY which will be met with patient sellers, who might become more aggressive if yesterday’s lows are taken out. The Fed’s job is about to become much more difficult: rising long-end yields in the context of a slowing economy.
–I always associated 1970s inflation with oil shocks. CLX4 was up 3.61 to 73.71 and is well over 74 this morning. Not quite a “shock” but just as rate futures completely erased the September rally, WTI has erased September weakness. Longshoremen strike has ended; perhaps the union boss didn’t appreciate the limelight of seeing his sprawling mansion on every news show. 62% pay raise over 6 years.
–Payrolls today expected 140 to 150 from 142 last. Rate expected 4.2%.
