The big U.S. job gains give the Federal Reserve a lot more work to do on taming inflation. At the moment, Fed officials are indicating that they expect the target interest rate to be lifted to a 3.50% to 4.00% range by the end of the year. The bond market, however, isn’t reflecting that level quite yet, even after Treasuries sold off on Friday after the blowout July jobs report arrived. If the inflation reports were to surprise to the upside, speculation of an inter-meeting rate hike by the Fed could be stirred up and lead to some bigger moves in the bond market.
So yes, Friday’s strong jobs report gives credence to the argument that the U.S. economy is not currently in a recession. 528,000 new jobs doubled estimates and highlighted a tight labor market where the unemployment rate at 3.46 percent is just below the pre-pandemic low of 3.47 percent. Many businesses reported difficulty with filling open positions despite job openings declining for the third straight month.
Elsewhere, both the manufacturing and services sectors of the economy reported expansion and in both reports prices paid eased. July’s ISM manufacturing and services indices both showed a slowdown in the pace of hiring, however not an outright collapse. While many market participants are still concerned about the potential for a recession, the strong payrolls data quickly changed many minds about the potential for another 75-basis point rate hike from the FOMC in September. Prior to the payrolls data the probability was roughly 30 percent, but it now sits at near 70 percent. This week’s CPI report could help temper those thoughts if inflation shows signs of easing.
Inflation is front and center this week. In addition to the Consumer Price Index on Wednesday we receive an update on the Producer Price Index Thursday, and import prices on Friday. The Quarterly Refunding this week consists of $42 billion 3-year notes, $35 billion 10-year notes, and $21 billion 30-year bonds. The Desk will purchase up to $2.3 billion today through Thursday with a new two-week schedule along with the reinvestment purchase amount released on Thursday afternoon. Today’s operation sees the Desk purchasing up to $839 million UMBS30 4.0 percent through 5.0 percent. With nothing of note on the economic calendar today, we begin the week with Agency MBS prices better by .125 and the 10-year yielding 2.80 after closing last week at 2.84 percent.
Market commentary by Rob Chrisman
Comments