The market was sitting on pins and needles last week, anxiously awaiting the latest Nonfarm Payrolls data and a fresh Unemployment Rate. Ahead of the release, as evidenced by the 10-Year US Treasury Note testing lower yields, the market was positioned for a weaker number than the survey of +106k jobs added and an uptick to unemployment to 4.3%. Notably, the whisper number before the release was for +96k with plenty of chatter that an even lower number could spur a July rate cut. Bonds reacted harshly with an immediate 10 basis point sell-off to the stronger-than-expected headline data as NFP printed +147k jobs gained and the unemployment rate fell to 4.1%. The equity market took the “good news is good news” approach and jumped to a new high with the S&P 500 Index closing at 6279.
Upon digging into the details of the data, however, I’m a little surprised that rates failed to retrace much of the move. Specifically, the change in Private Payrolls fell significantly from the prior months' +140k level and printed +74k, well below the +100k survey. Much of the increase to Nonfarm Payrolls came from state and local government hiring, which is arguably seasonal, with hiring for teachers and educators included in that group. Thus, the headline number may misrepresent the strength of the overall jobs market.
Prior to the release, markets were pricing in a 25% chance of a FOMC rate cut at the July 30 meeting and fully priced in a cut for September 17. Following the release, expectations dropped to around 5% for a July cut and only a 68% chance for a September cut. Despite recent comments from Waller and Bowman (arguably angling for a shot at the Fed Chair job) that a July cut was a consideration, most Fed officials continue to espouse the wait-and-see approach. I remain firm, if only slightly less convicted, that the Fed will not follow through with 2 rate cuts as predicted in the latest SEP (Dot-Plot) and interest rates will move higher as we progress through the remainder of the year. If future data continues along the lines of the most recent PCE data, indicating a higher level of inflationary pressures, and employment fails to meaningfully cool, the Fed will have a difficult time justifying rate cuts given their data-dependent approach and adherence to weighing the balance between their dual mandates of price stability and maximum employment.
Finally, let’s look back at the market reaction to the last Fed rate-cutting cycle. See the chart below for details. Essentially, 10-Year US Treasury rates rose by over 80 basis points as the Fed enacted 100 basis points of rate cuts between September and December 2024. Factors that contributed to this price action in the longer end of the Treasury curve included better-than-expected economic growth, along with economic uncertainty and inflationary impacts surrounding the Trump administration’s policies. Presently, we continue to see signs that economic growth could outperform, and uncertainty regarding the impacts of the Trump agenda continues to hang over the market. Additionally, we now have the added concern that bond vigilantes may exert their influence, and the rising federal deficit has certainly become a larger consideration. In short, despite the unusual market reaction, we could again see higher long-term rates and a further steepening of the yield curve regardless of Fed action on the front-end.
From the Municipal Desk (with contributions from Ryan Riffe):
The municipal bond market maintained its positive tone throughout the shortened holiday week. With a limited primary supply totaling only $2.5 billion, investors were more focused on the secondary market to meet their demand. This scenario helped municipals outperform US Treasuries over the course of the week. The municipal curve continued its steepening trend as the AAA MMD scale saw yields fall by as much as 8 basis points, while longer maturities of 2038 and beyond remained unchanged. Looking ahead, the market shows no signs of slowing down. The new issue calendar is expected to rebound sharply, with over $10 billion in supply anticipated to price in the coming week, signaling a return to more typical issuance levels.
Ratios as a percentage of Treasuries
3-Yr 66%
5-Yr 66%
10-Yr 74%
30-Yr 93%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.
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