To: Johnny Canuck who wrote (59581 ) 8/4/2024 2:35:03 PM From: Johnny Canuck Read Replies (1) | Respond to How a Jobs Report Sent the Fed From a Soft Landing to Behind the CurveIt only took a few days for the bond and stock markets to ring the alarm bells on a slowing economy.Nicholas Jasinski “Everything in moderation, including moderation,” goes a line varyingly attributed to Socrates, Benjamin Franklin, and Oscar Wilde. No matter who said it, the quote is apt. For months, moderation ruled. Bad economic news was good news for stock and bond investors, who appeared to have their cake and eat it, too. Inflation was falling and economic strength with it, but not so much as to raise immoderate alarm bells. A soft landing was the near-consensus call on Wall Street. Inflation closing in on the Fed’s 2% annual target, paired with a normalizing labor market, sent bond prices rallying and lifted stock indexes to record highs. The Federal Open Market Committee’s postmeeting news conference on Wednesday with Fed Chairman Jerome Powell all but confirmed a September start to lowering the federal-funds rate from a two-decade high of 5.25% to 5.5%. “I don’t think the labor market in its current state is a likely source of significant inflationary pressures,” Powell said. “So, I would not like to see material further cooling in the labor market.” Well, Powell won’t have liked Friday morning’s release of July jobs data , which showed a smaller-than-expected gain of 114,000 nonfarm payrolls last month, as the unemployment rate ticked up to 4.3%—a nearly three-year high. Combined downward revisions of 29,000 jobs in May and June added insult to injury. The dud of a jobs report came in the wake of a weak manufacturing report and other data suggesting flagging consumer and housing activity. Bad news was bad news, as economic angst outweighed the tailwind of potential rate cuts. Bonds & Rates The growth scare set off a stampede from risk assets, with the Nasdaq Composite and Russell 2000 tumbling and oil prices tanking. Interest-rate futures pricing swung to imply the greatest odds on Friday of more than a percentage point of easing before the end of 2024—a likelihood priced at 7% a week earlier—including a possible half-point cut in September. Traders appear to be hedging against a Fed quickly responding to a recession with stimulus, rather than gradually normalizing interest rates in a soft landing. Bond yields moved in concert with futures. The yield on the 10-year Treasury note dropped to 3.79% on Friday, down by 0.40 percentage point last week to its lowest level since December. There’s still downside for bond yields—and upside for prices—should the Fed become more aggressive with rate cuts, as the futures market is predicting. Get a sneak preview of the top stories from the weekend's Barron's magazine. Friday evenings ET. SUBSCRIBE NOW “My guess is that we remain in a secular bond bear market that began in 2021, but it might well be that we are embarked on a shorter-term bond bull market within that context,” says James Grant, editor of Grant’s Interest Rate Observer. Stock investors are in a tougher spot. Lower bond yields are usually a positive for stock valuation measures like the price/earnings ratio, but less so when the driver is economic concerns that drag down the denominator. The next potentially consequential data release will be the July consumer price index on Aug. 14. Fed officials will also get a look at August jobs and inflation data before their Sept. 17-18 policy meeting. “We will be data dependent but not data-point dependent, so it will not be a question of responding specifically to one or two data releases,” Powell said on Wednesday. Fair enough, but that was one heck of a data point on Friday. After widely panning the Fed for being behind the curve in 2021 and raising rates too late, a growing chorus is now warning that officials are too slowly responding to signs of economic slowing. With only three months to go until Election Day, the scrutiny—or the stakes—won’t get any less intense. Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
