Rare Dynamic Plays Out Amid Weak Jobs Data, Stubborn Bonds
Odds of an October hike fell to about 20%, but bonds gave back their gains and rates kept rising.
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The employment report on Friday morning was weaker than expected. The economy added just 29,000 jobs in September, well below the 84,000 level that economists were expecting. July and August were revised down by a combined 60,000. The unemployment rate rose to 4.2%, and wage growth slowed to 0.1% for the month.
That doesn’t sound very positive and raises concerns about growth, but in this case the market jumped higher at the open because it relieves some inflationary pressure. Bonds rallied, and the odds of a Fed rate hike on October 28 fell to around 20%. Just a week ago, they were at 64%.
Bonds Still Can’t Hold a Rally
Despite this positive development, bonds couldn’t hold on to their gains, and the iShares 20+ Year Treasury Bond ETF (TLT) fell again late in the day. It is an unusual dynamic when yields on bonds are still rising while the odds of a Fed rate hike at the next meeting are declining.
The problem is that longer-term inflation expectations remain elevated, and one month of weak jobs news is not enough to reverse a trend that has been building for months. The Fed may be less likely to act immediately, but that doesn’t mean the bond market won’t keep pushing rates higher on its own especially when it comes to long-term bonds.
Better Day for Stocks
Equities were better, but it was not a vigorous bounce. Breadth was around 57% positive, and the number of new lows contracted to close to 300 with new highs at 100. The Magnificent Seven led the action, and the Russell 2000 finally enjoyed a decent day with a gain of close to 1%. It would have been better to have a stronger finish, but it was nice to see a few improved pockets of strength.
The big question now is whether we will start to see some positive anticipation as we head into earnings season. The inflation and interest rate issue isn’t going away, but has the recent weakness discounted it sufficiently to provide some technical support? Will anticipation of good reports and guidance attract some buying interest?
Game Plan
I’m ready to put more cash to work, but I want to see continued action like we had on Friday. Bonds’ refusal to rally better on the weak jobs news isn’t a good sign, and I want to see how things develop next week before I make any moves. We have some minor signs of stabilization after this crazy two-tiered action but more work needs to be done.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
