(Bloomberg) — The world’s biggest bond market rallied after the latest jobs report reinforced bets the Federal Reserve will cut interest rates this year.
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Treasury yields dropped across the curve as data showed US hiring moderated in June and prior months were revised lower. Stocks wavered near all-time highs. Swaps currently project almost two Fed reductions in 2024, and bets have been building around a September start of the policy easing cycle.
Nonfarm payrolls rose by 206,000 in June and job growth in the prior two months was revised down by 111,000. The median forecast in a Bloomberg survey of economists called for a 190,000 increase. The unemployment rate rose to 4.1%, and average hourly earnings cooled.
“Get on with it,” said Neil Dutta at Renaissance Macro Research. “Today’s employment report ought to firm up expectations of a September rate cut. Economic conditions are cooling and that makes the trade-offs different for the Fed.”
US 10-year yields fell five basis points to 4.31%. The S&P 500 headed toward a weekly gain. Bitcoin sank on concerns about potential selling by governments, creditors of a failed exchange and beleaguered crypto miners. UK assets gained after Keir Starmer’s Labour party swept to a landslide election win.
Wall Street’s Reaction to Jobs:
Though it may seem counterintuitive, a rising unemployment rate in this environment is less like deterioration and more like normalization. Putting too much weight on nonfarm payrolls is like playing a two-month long game of “pin the tail on the donkey.” Investors should instead focus on the unemployment rate for a more reliable read on the state of the labor market.
Average hourly earnings were right on the money with consensus estimates. If we can string a few of these sorts of readings together, that will likely give the Fed a little more confidence in the latest disinflation trend.
The base case remains two rate cuts beginning later this year. Investors should circle the September Fed meeting as the first truly “live” meeting for rate cut considerations, but they should make sure to use a pencil with a good eraser in case inflation does not cooperate by then.
The job market is bending without yet breaking, which boosts the argument for rate cuts. Things are not too hot and not too cold. Goldilocks is here and September is in play.
From the Fed’s perspective, the labor market isn’t soft enough justify an interest rate cut at this month’s meeting. But the labor market’s cooling trend is quite clear. If inflation holds in its recent range, the Fed is likely to make an initial rate cut at the following decision, in September.
This job report could provide the Federal Reserve with the confidence to reduce interest rates in September as despite inflation remaining above target, the job market shows clearer signs of cooling. This is the type of job report the Fed has been anticipating: softer yet still decent data, potentially justifying two rate cuts this year.
While the June jobs report topped expectations, other components within the report continued to highlight a softening labor market.
It’s not all doom and gloom. Given how low the unemployment rate was, it was only a matter of time until it ticked higher — particularly with the Fed’s aim to cool the economy. Now though, we are seeing economic softness, which should prompt the Fed to cut rates before it turns into outright economic weakness. Consensus expectations call for a September cut and today’s jobs report should increase investors’ confidence in that scenario.
The equity market may be a little conflicted how to respond to today’s jobs report. On one hand, the downward revisions to prior months and the rise in the unemployment rate raises the odds of a September Fed rate cut – bond markets are certainly celebrating this. But those same figures cannot help but prompt a twinge of concern about the direction of the US economy. The broad host of economic data all point to a softening – today’s report adds to that picture.
The bottom line is that the labor market is gradually cooling down, which is helpful for the Fed’s view that inflation is slowly cooling down.
Looking ahead, the key discussion in markets will be whether this cooling will accelerate to the downside because of still-elevated costs of financing. Or whether we will see a reaccelerating economy because of high stock prices and tight credit spreads.
Our view remains unchanged. This report confirms that it is going to take time for the Fed to cool down the economy and inflation, and we still don’t think the Fed will cut rates this year.
Net-net, this was good news for the Fed. Payrolls came in hotter than expected for June, but that was balanced by a big downward revision for May and an uptick in unemployment. Overall, it suggests the labor market is slowing — maybe not enough to speed up rate cuts, but perhaps enough to keep the Fed on track for September.
With the Federal Reserve seeing inflation data in the statistical neighborhood of where it wants it to be, it is expected to cut interest rates in September. If the job market continues to cool and inflation allows, the central bank will shift some of its attention away from the stable prices part of its mandate to increasingly focus on the other issue which is maximum employment.
The combination of this morning’s data along with a grinding trend higher in jobless claims should bolster the case for the Fed to kick-off the long-awaited rate cutting cycle in September, which remains our base case. Today’s release should provide support for risk assets as Treasury yields across the curve are likely to see pressure despite thin holiday trading, as markets remain firmly in a “bad news is good news” environment.”
So far, we don’t see apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls. The downward revisions to the previous two months is consistent with an economic slowdown. We should expect more rhetoric out of the Fed about labor market conditions and the importance of keeping policy appropriate for their dual mandate.
The higher unemployment rate suggests a broader economic slowdown. The cooling in the labor market, despite the higher than consensus estimate for the headline payroll print, portends a broader economic downturn as the all-important consumer becomes more concerned about the ability to find new jobs as well as continued job security.
Fed Bank of New York President John Williams said that while inflation has cooled recently toward the Fed’s 2% target, policymakers are still some distance from their goal.
Bond funds recorded about $19 billion in weekly inflows, the biggest additions since February 2021, according to a note from Bank of America Corp. citing EPFR Global data. The trend suggests investors are “locking in peak yields,” strategist Michael Hartnett wrote.
About $51.9 billion flowed into cash funds in the week through July 3, the biggest addition in two months. Global equity funds record inflows of $10.9 billion in the longest winning streak since December 2021.
Traders are also keeping a close eye on any developments regarding the US presidential race. Joe Biden is embarking on the most consequential weekend of his political career, knowing that he must restore the faith of voters, donors, and party officials deeply skeptical of his acuity — and that any misstep will prove fatal to his reelection campaign.
Corporate Highlights:
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Macy’s Inc. climbed after the Wall Street Journal reported that Arkhouse Management and Brigade Capital Management have raised their buyout offer for the department store operator to about $6.9 billion.
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Canada has approved Glencore Plc’s $6.9-billion acquisition of Teck Resources Ltd.’s metallurgical coal business, while the latter announced a $2 billion share buyback and pledged to boost copper output.
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Samsung Electronics Co. posted its fastest pace of sales and profit growth in years, reflecting a recovery in memory chip demand as AI development accelerates globally.
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BBVA SA’s investors voted to support the lender’s bid for rival Banco Sabadell SA, allowing Chairman Carlos Torres to clear one hurdle in his attempt to create a domestic banking giant.
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Shell Plc expects as much as $2 billion of impairments in its second-quarter earnings related to a delayed biofuels plant under construction in the Netherlands and its chemicals facility in Singapore.
Some of the main moves in markets:
Stocks
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The S&P 500 was little changed as of 9:47 a.m. New York time
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The Nasdaq 100 rose 0.1%
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The Dow Jones Industrial Average was little changed
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The Stoxx Europe 600 was little changed
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The MSCI World Index was little changed
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro rose 0.1% to $1.0824
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The British pound rose 0.4% to $1.2807
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The Japanese yen rose 0.2% to 161.00 per dollar
Cryptocurrencies
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Bitcoin fell 4.7% to $55,568.82
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Ether fell 5.8% to $2,960.67
Bonds
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The yield on 10-year Treasuries declined five basis points to 4.31%
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Germany’s 10-year yield declined three basis points to 2.57%
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Britain’s 10-year yield declined six basis points to 4.14%
Commodities
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West Texas Intermediate crude was little changed
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Spot gold rose 1% to $2,380.96 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from John Viljoen, Divya Patil and Richard Henderson.
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