FRB Chair Powell stated that monetary policy will be largely dependent upon the jobs market. Yesterday the monthly JOLTS Survey was considerably lower than expected, falling to the lowest level since the start of 2021. Moreover, the prior month was revised marginally lower.
Led by the two-year Treasury, Treasuries rallied across the curve. For only the second time since 2022 the yield on the two-year note fell momentarily below the yield of the 10-year note. About 15 months ago two-year yields exceed the 10-year yield by as much as 111 bps, the biggest inversion since the early 1980s.
Everyone knows every recession since WWII has been preceded by an inverted yield curve but not every inverted yield curve has produced a recession. There have only been 13 recessions since WWII but the yield curve has been inverted between the 2-year and 10-year Treasury over 50 times during the same period.
It is because of this inversion is why most—including the Federal Reserve—have been forecasting a recession for over the past 18 months. As widely discussed, growth has largely accelerated.
Interest rate swaps have fully priced in a quarter point rate cut at the Fed policy meeting this month and a more than a 30% chance of a half point reduction. A total of 107 bps of easing is expected at the remaining three meetings this year.
How accurate is this outlook? Perhaps the only accurate statement to make is that the bond market is priced for a significant slowdown and if one does not occur, yields could easily retrace back to higher levels.
Continuing with this theme, equity markets are on the edge of their seats ahead of tomorrow’s labor report from the BLS. Last month following the release of the monthly statistics, equities staged a dramatic two-day decline with some were then suggesting the Central Bank would make a rare intermeeting 50 bps reduction.
Last night the foreign markets were mixed. London was down 0.14%, Paris down 0.65% and Frankfurt up 0.18%. China was up 0.14%, Japan down 1.05% and Hang Seng down 0.07%.
Futures are nervously flat ahead of tomorrow’s jobs report. The 10-year is off 3/32 to yield 3.77%.
