All eyes were on the major construction report this week. Traders were eager to see if it would be strong enough to accelerate the timing of major policy changes that would have a huge impact on rates.
The bond market and many owners remember 2013 temper tantrum Very good. For those in need of a refresh, the tantrum tapping came after the Fed started cutting bond purchases that were keeping interest rates low. Rates have climbed at one of the fastest rates in history.
With the Fed again purchase $ 120 billion per month in treasury bills and mortgage-backed bonds since the start of the pandemic, traders know there will eventually be another account. Fed speakers have been clear that they will give enough warning this time around, but no one wants to be late for this party! So traders are perpetually dissecting all incoming economic data looking for warning signs.
Among these data, the Big Jobs report (officially, the Bureau of Labor Statistics “Employment Situation”) reigns supreme. No other report is held in the same direction when it comes to its ability to guide political and business decisions.
As the number of covid cases declines and vaccinations increase, local economies are quickly returning to more normal activity levels. Traders expected this activity to start showing up in the data. but the turnaround was not as noticeable for the major construction report.
For example, the second most important report this week, the monthly index of activity in the service sector published by the Institute for Supply Management (ISM) has just hit an all-time high. The higher it is, the faster the economy grows.
In addition, several of the other Labor Week reports have shown continuous improvement. Particularly noteworthy is the long-standing, but still rather obscure “Job Cut Report” from recruiting agency Challenger, Gray and Christmas. He hit his lowest level in 2 decades last month, and basically kept it in the most recent report.
Weekly data tells the same story with jobless claims hitting another post-pandemic low.
In fact, even considering the title of the Big Jobs report (559,000 new jobs created last month against only 278k month before), it seems like everyone is on the same page and we should be worrying more and more about the Fed. But the catch is, the market would have needed to see a number closer to 1 million to really panic. As it stands, 559,000 have not even reached the median forecast of 650,000.
When we look at a minute-by-minute breakdown of the reaction to the jobs report, we can see how nervous both sides of the market were. Stocks and bonds (aka “rates”) improved almost instantly and quite significantly.
And when you zoom out a little bit, it feels like this isn’t the first time stocks and bonds have moved in this symmetrical pattern – improving together when expectations of Fed support improve. and losing ground together when Fed support seems less certain.
We are using the stocks in the charts above only to illustrate a point about how the global financial market is reacting to the Fed’s accommodation outlook. The bond market is what matters for rates, and the the overview is quite clear: despite any short-term volatility, we remain in an “intermission” after the rise in rates at the start of the year.
Note: Mortgage rates did not follow the same path as Treasury bills, but it was a exception to a generally high rule. While we can still see small deviations from this rule, the big disconnect of 2020 is now resolved. Translation: It is once again acceptable for mortgage rate watchers to pay attention to trends in Treasury yields.
So what does this week’s employment report mean for rates? That means we can do the same song and dance next month, if not sooner! The jobs report data was collected over 3 weeks ago and things are changing fast. Every new update in the job market runs the risk of making the Fed’s banging rhetoric a reality. We can profit from these short-term rate rallies, but unless there is a major economic downturn, the intermission is more likely to give way to another higher move.