Unemployment is rising. That was the main message from last Friday’s U.S. jobs report. The unexpected jump in unemployment to 4.3% and the potential temporary layoffs due to Hurricane Beryl contributed to a cooling labor market. Evidence shows that Friday’s jobs number was understated, leaving room for a possible upward revision at the next NFP report on September 6. Combined with softer wage growth, weak manufacturing data, and other economic factors, the market and the Federal Reserve appear positioned for interest rate cuts in the coming months.
In our opinion, the 7 or 8 rate cuts currently priced in through the end of 2025 seem excessive. For context, the consensus forecast for U.S. real GDP in 2025 is 1.7%. It is difficult to envision a soft landing in the second half of next year if the Fed needs 175 basis points of cuts. In our view, something has to give; either GDP growth forecasts must fall, or market agents are unnecessarily hyperventilating about Fed rate cuts. 175 basis points of cuts and a 10-year yield below 3.75%, the market may be concerned about more than a weakening labor market.
Global bond yields collapsed on Friday, with the 2-year Treasury yield falling 67 bps last week to close at 3.73%. Yields were also sharply lower in Canada, the U.K., and Australia. In the U.S., the 2/10s curve steepened 17 bps, and at -2 bps, disinversion is nearly complete. Rate volatility was +14% last week (MOVE Index).
Is it a growth scare or something else? We are not convinced that the collapse in global sovereign yields is due solely to the U.S. economy. Consider the Bank of Japan’s (BOJ) sharp policy reversal in recent months: hiking policy rates from -0.10% to +0.25%, abolishing yield curve control and announcing plans to halve the central bank’s bond purchase program. The BOJ’s actions can ripple through the global markets due to Japan’s significant role in international finance.
Source: Bloomberg, August 5, 2024
Note: All data sourced from Bloomberg unless otherwise noted.
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