April’s jobless data was weaker than expected. Non-farm payrolls advanced 175,000 last month, the smallest gain in six months. The unemployment rate ticked up to 3.9%, the labor participation rate held steady but the pivotal rate for workers aged 25-54 increased to 83.5%, matching the highest level in two decades. Increased participation will help restrain wage growth.
Speaking of wages, April’s average hourly earnings climbed 0.2% from March and 3.9% from a year ago, the slowest pace since June 2021.
Most expected a stronger increase as this data conflicts with other statistics suggesting wage pressure. Moreover, on April 1 California’s law mandating a $20 minimum law for fast food workers went into effect.
The data ignited a gigantic rally in the Treasury market as yield on the 2-year Treasury or instrument most sensitive to monetary policy plunged 15 bps to around 4.71%. Three days ago, yields were over 5%. The 10-year Treasury was up about a point to a 4.50% yield. Several days ago, this benchmark yield was around 4.70%.
Fed funds futures are now suggesting the first interest rate reduction will be in September as compared to December prior to the data. Futures are also suggesting 50 bps of cuts may occur this year, up from about 14 bps just prior to the data’s release.
This insane volatility in the bond market is a direct result of the lack of liquidity where any statistic that differs from the consensus view will be met with an outsized response.
Accordingly, equities surged at the market opening, far eclipsing the 1.2% expected move forecasted by futures the day before if the data differed from expectations. The Dow gapped and NASDAQ gapped up 1.5% and 2.0%, respectively.
It feels the markets are always one data point away from new economic narrative, an environment perhaps the result of the Fed adamantly stating monetary policy is data dependent.
As noted above, the volatility is incredible. Many were concerned that this chronic and intense bond market volatility will cause something to break. Domestically it has not as the systems have been stress tested.
But what are the odds that something might break in another country’s markets given that the dollar and the Treasury are the global benchmarks that world’s financial system and economies are based on?
Some have raised such concerns, but concerns have been quickly dismissed.
What will happen this week? The economic calendar is sparse and the majority of the S & P has posted earnings thus suggesting the headlines may be the primary determinant of market direction.
The economic calendar is comprised of several second-tier data points such as inventories, a sentiment indicator and weekly jobless claims.
Last night the foreign markets were up. London was up 0.51%, Paris up 0.81% and Frankfurt up 0.91%. China was up 1.16%, Japan down 0.10% and Hang Seng up 0.55%.
Futures are up about 0.25% on hopes that the Fed will ease this year. The 10-year is up 7/32 to yield 4.48%.
