Baker Market Update – wk211203

The US jobs report for the month of November paints a complex picture of the labor market recovery as a weaker-than-expected 210K new payrolls were added but the unemployment rate fell sharply. This is partly due to discrepancies in the two surveys that comprise the report: the “establishment” survey which produces the payrolls count, versus the “household” survey which polls individuals on their employment status. The household survey indicated a large increase in the labor force and a 0.4% drop in the unemployment rate to 4.2%… an excellent result to be sure. Less than six months ago, the rate of unemployment was nearly 6%. It’s important to remember, though, that the household survey includes working persons who say they are self-employed or otherwise don’t show up on company payrolls data. The report showed wage growth came in at 4.8%, weaker than expected and slower than the previous month. The number of people employed in the US remains nearly 4mm lower than pre-pandemic.

Earlier in the week, markets were treated to consecutive days of testimony from Fed Chair Jay Powell and Treasury Secretary Janet Yellen. Powell rocked markets on day one with an abrupt acknowledgement that inflation may not be as “transitory” as previously thought, and that the term itself should no longer be used. He reinforced his determination to keep inflation in check on day two of his testimony saying Fed policy has to be adapted to the persistent factors causing higher inflation. Per the Chairman, “It’s appropriate that we consider at the next meeting tapering faster so that it wraps up a few months earlier.” This gives the Fed flexibility to raise the fed funds rate whenever they deem appropriate.

As to market behavior, the US 2yr T-Note yield reached the highest level of the year shortly after the release of the jobs report this morning. Simultaneously the 10yr yield fell to 1.38% yield, the lowest in over two months. The yield spread between 2s and 10s has now fallen to 78bps from 160bps last March. This flattening of the yield curve is significant. It reflects the acceleration of tapering that Powell suggested, and gives a signal to the Fed to be careful not to move too far or too fast in tightening (or removing stimulus). Money has also been bleeding out of stocks and into the safe haven of Treasuries in the wake of a new, more assertive Fed. Next week we’ll get to look at fresh data on consumer price inflation, a key piece of the puzzle indeed.

Yield Curve Flattening: March ’21 vs Today

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