The Treasury market got hit hard following a blockbuster May jobs report that lowered expectations for Federal Reserve rate cuts. The 10-year Treasury yield climbed about 13 bps to around a 4.4% yield and swaps no longer price an interest rate cut before December.
As recently as Thursday two money center banks were predicting an interest rate cut in July given their perception of a deacceleration of economic activity.
Non-farm payrolls advanced 272,000 last month, far exceeding any projections in a Bloomberg survey of economists. The unemployment rate increased to 4.0% from 3.9%, the result of a declining labor participation rate to 62.5% from 62.7%. Average hourly earnings doubled from the month before, climbing 0.4% from April and 4.1% a year ago.
Bloomberg quantified the strength of payroll growth, 4 standard deviations away from the expected strength. A four standard deviation move occurs only one minus 0.999936657516334. In other words, it is a very rare event.
Many have asked why the data is consistently missing expectations, sometimes by a large degree as evidenced by May’s payrolls growth.
Fed Chair Powell has stated the data has perhaps been corrupted by the political process, a frightening statement given the data is what decisions are based upon. The FRB has consistently stated the data will dictate monetary policy, hence the narrow but significant volatility. But if the data has been corrupted, are decisions not being made in a vacuum?
This week a two-day FOMC meeting occurs. No change in monetary policy is expected, however the Committee will update the “dot plot” or the anonymous survey of the FRB members as to where each member thinks the overnight rate will be at a given period in time.
The market is suggesting the dot plot will only contain one interest rate cut. At the beginning of the year, the dot plot was suggesting three or four reductions [which was the same outlook as 2023] while the market was forecasting six or seven cuts.
The Federal Reserve is regarded as the most august economic forecasting body in the world staffed with hundreds of economists and PhDs. Wall Street is staffed with independent thinkers who craft an economic narrative to fit their projected or preconceived market outlook.
It was once written that both Wall Street and the Federal Reserve are wrong about 49% of the time. At some juncture both bodies will again be correct, it is just a matter of time.
Commenting on Friday’s activity, Treasuries traded higher in yield across the curve. Equities rebounded from early morning losses to close almost unchanged perhaps under the simple guise that “there may be more cuts later.” Moreover, the solid jobs report quelled some fears that the economy is slowing too dramatically which could impact profits.
For what it is worth department, NVDA is responsible for 33% of the market’s YTD return.
Nvidia was 0.35% of the S&P 500 in 2019 and became over 2% of the index in 2021. It is now 6.5%, its second largest member and has increased YTD in value by $1.5 trillion.
For NVDA to go up 1% from today’s levels, capitalization must increase by $30 billion. Writing it differently, a 1% increase in NVDA would be more than the value of Dupont or Delta Airlines.
Commenting further on the massive concentration of wealth in the S & P 500, the top three companies are now 20% of the index. Seven years ago, they were only 8%
Six companies now represent 30% of the S & P 500, up from 26% at the start of the year.
As noted the other day, for most of the past three decades, the percentage weighing of the six biggest stocks in the benchmark was in the mid-teens. It was not until 2020 that the concentration exceeded 20% as per Bloomberg.
This is a precarious and concentrated market whose performance is potentially hinged on every word from the FOMC. Hopefully, Powell et. al. will echo conciliatory remarks on Wednesday.
This week’s economic calendar contains several key inflation statistics including the CPI, the PPI, import/export price index, a sentiment indicator and the a for mentioned Fed meeting.
Last night the foreign markets were down. London was down 0.31%, Paris down 1.79% and Frankfurt down 0.65%. China was up 0.08%, Japan up 0.92% and Hang Seng down 0.59%.
Futures are lower by 0.25% ahead of the commencement of the two-day FOMC meeting and key inflation data. The 10-year is off 7/32 to yield 4.47%.
