Last week’s employment release delivered a mixed message. The unemployment rate climbed to 4.6%, its highest level since 2021, reinforcing the view that the Fed’s recent rate cuts aimed at supporting a cooling labor market may be justified. The combined Nonfarm Payrolls report for October and November was slightly mixed: October saw a 105k decline, while November posted a modest 64k gain. Notably, October’s negative reading was largely attributable to over 150k furloughed federal employees filing during the month.
Markets reacted only mildly to the jobs data, leaving investors questioning how to interpret the labor backdrop. One possible explanation for the muted response is speculation that labor supply has tightened due to President Trump’s immigration policies, reducing the pool of available workers. This raises doubts about the long-standing assumption that monthly job gains of 100k+ are necessary to maintain equilibrium.
On the inflation front, Thursday’s CPI release failed to provide the clarity that markets were expecting. Headline CPI came in at 2.7%, with core CPI at 2.6%, signaling progress toward disinflation. However, questions emerged about the methodology used to combine October and November data following the government shutdown. Notably, the shelter component - a key driver of inflation in recent years - was distorted because Owners’ Equivalent Rent (OER) was marked as missing and effectively treated as zero. Zillow estimates suggest OER should have been closer to +0.22%, underscoring potential flaws in the reported figures. In short, both employment and inflation data leave the current economic picture as clear as mud.
Equities remain range-bound, hovering just below October highs and delaying hopes for a Santa rally. Bonds were similarly static, with the 10-Year yield trading between 4.10% and 4.18%, closing near 4.15%. The 2-Year note, more sensitive to Fed policy, broke below the 3.50% support level, a notable technical move. The Treasury curve continues to steepen, driven by a sharper decline in short-term yields compared to the long end - a move consistent with expectations for a more accommodative Fed, and should be expected to continue going forward
Meanwhile, Washington headlines continue to focus on the Fed. Markets await President Trump’s decision on a successor to Chair Powell. While Kevin Hassett was widely seen as the front-runner, recent chatter suggests the field remains open, with Warsh, Waller, and Rick Rieder (BlackRock) still in contention. A surprise “dark horse” candidate cannot be ruled out, especially given Trump’s unpredictable nature
Fed officials have been actively making headlines, offering contrasting interpretations of recent data:
From the Municipal Desk (with contributions from Ryan Riffe):
The municipal market finished its last full week of trading with a quiet tone. This came as no surprise, as just $6 billion of new issue supply was priced. Front-end ratios continue to hover just below 70% while the 10-Year ratio has firmly planted itself at 67%. Outside of two basis points of strength for 1-3 YR maturities, the MMD scale finished the week unchanged. Municipals continue to remain largely indifferent, showing little reaction to movements in the Treasury market. A quiet tone is expected to persist through the remainder of the year as the market will price in just over $3 billion of supply during the shortened Christmas holiday week.
30-Day Visible Supply @ $3.22 Billion
Weekly Calendar expected @ $3.10 Billion
2-YR Ratio @ 69%
3-YR Ratio @ 68%
5-YR Ratio @ 66%
10-YR Ratio @ 67%
30-YR Ratio @ 88%
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