The first week of November was not boring for financial markets as we got an important read on both the labor market and the current leanings of policymakers. On Wednesday Fed Chairman Jay Powell clarified and reinforced his determination to achieve absolute victory in the war on inflation, but not before a bit of confusion. The FOMC customarily released its post-meeting statement which was initially interpreted as slightly dovish, but the Chairman quickly squashed any notions that the committee was going wobbly in its mission. The official FOMC statement emphasized that in order to maintain a path back to their eventual goal of 2% inflation, the committee would take into account the cumulative tightening to date as well as time lags for policy to take effect. That was seen as a nod to those on the committee who worry the Fed could go too far too fast. Powell, however, quickly followed in his presser with the comment that it would be “very premature to talk about pausing… We still have a long way to go”. Quite the buzz-kill for both bonds and equities. Importantly, however, Powell also said “the time to slow the pace of rate hikes may come as soon as the next meeting “, an indication that we may see a smaller hike of 50 basis points in December.
Market reaction was at first positive bringing the yield on the 10yr Treasury below 4%. But Powell’s comments caused a quick reversal to 4.19%, near a new cycle high. The bigger reaction was in the two-year note which reached 4.73%, its highest level since 2007. The yield curve inversion between two and 10 year yields remains -54 basis points, and many suspect that this inversion will deepen further as we progress in the cycle.
Meanwhile, the jobs market data presented its own conundrum. Earlier in the week we discovered the job openings had jumped unexpectedly, suggesting that there remains slack in the labor force. Then this morning the BLS reported that we added 261K jobs in October, notably higher than the 193K estimate. Data for the last two months were revised higher as well. Though job creation was better than expected, it remained the smallest job gain since the end of 2020 and shows the labor market continues to cool as rate hikes gradually work through the economy. The unemployment rate ticked up to 3.7%. Remember that the jobs report contains two components, the payrolls report and the household survey. And in the survey of households, the economy showed a loss of more than 300K jobs. The household survey may be a canary in the coal mine that leads the payrolls data in showing weakness. All of this indicates that the labor market is showing the effects of the Fed’s demand destruction, but only slowly.
US Non-Farm Payrolls and Employment Change
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