Lost Worlds
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This morning’s jobs report showed payroll creation at 528,000 for July, down from a median forecast of 250,000 and a previous reading of 398,000. Perhaps just as damaging for the bond market, wages settled at 0.5 from 0.3 f’cast and was revised up by 0.1 last month. Strong arguments against recession (or for wage inflation) create problems for bonds. The reaction this morning was immediate and severe, as was the similar argument made by ISM services data 2 days ago. These two reports represent the biggest sales of recent weeks.
In terms of shorter-term Fed rate hike expectations, today’s jobs report was even more detrimental than the ISM. Traders now see the Fed hike a quarter point by the end of 2022.
The damage from good economic data is hitting bonds in a different way than the inflation reports that rocked the market in June and July. Inflation is doing more to lift short-term rate expectations, while strong economic data keeps rate expectations higher for longer. The chart below shows how that played out between July’s CPI inflation data and the more recent ISM Services report and today’s jobs report.
Notably, the strong data helped the green line close the gap with the orange line. In other words, in late July, traders saw the fed funds rate drop a quarter point in mid-2023 from December 2022. Now they see no difference at all.
If there is a saving grace, it is that the market has been less and less troubled by the data compared to the June CPI. That said, the June CPI report came out just days before the Fed’s announcement and markets were unsure of the Fed’s reaction. This time, their reaction function is better understood.
