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

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizes software and products developed by Baker’s Software Solutions* combined with the firm’s investment experience and advice.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.