It wasn’t all that long ago
When Powell commanded the show
At least so it seemed
But maybe we dreamed
Those attributes we did bestow
 
But now traders seem not to care
That Wednesday, Chair Jay said beware
No rate cuts next meeting
Instead, they are treating
That warning’s though it wasn’t there
 
The upshot is bonds are on fire
And stocks turned around and went higher
Today’s NFP
Will help us to see
If Jay is still leading the choir

 

Well, it seems that Chair Powell’s hawkish message resonated with investors for about 12 hours, at which point they decided to forget all he said and side with Treasury Secretary Yellen and her spending plans.  Or maybe the trading community just doesn’t believe he can pull it off, keep policy rates at 5.5% while the government needs to borrow so much money.

There are other possible explanations as well.  The NYCB meltdown yesterday may have opened some eyes regarding the commercial real estate (CRE) problems that certainly exist everywhere in the world, but notably here in the US.  If reclassifying just two loans was enough for a $100 billion bank to cut their dividend completely and increase loan loss reserves nine-fold, what about all the other CRE loans that are also under pressure on other bank balance sheets?  Perhaps the bond market is sniffing out the next banking crisis in front of our eyes.  For the conspiracy theorists, the Fed did remove the following line from their statement yesterday, “The U.S. banking system is sound and resilient.”  Perhaps that was a hint that it is not sound and resilient.

Regardless of the driver, yesterday saw a ripping rally in the bond market with the 10-year yield touching 3.82% before bouncing, nearly as low as it reached following Powell’s ultra-dovish performance in December.  That certainly doesn’t square easily with the hawkish statement and comments on Wednesday.

I have no good explanation for the movements, and I would argue neither does anyone else.  As has been the case for the past year, at least, economic data is simply a Rorschach test for your underlying views and biases.  Once again, the financial markets appear to be fighting the Fed tooth and nail.  Perhaps one clue was the fact that gold prices rallied yesterday, as did bitcoin.  Now, it is possible that is simply because lower yields enhance the willingness to hold those assets, or perhaps it is because the market smells a banking crisis coming and wants to hide.

Fortunately, we get new and important information this morning with the release of the NFP data at 8:30.  Here are the current median forecasts:

Nonfarm Payrolls	180K
Private Payrolls	155K
Manufacturing Payrolls	5K
Unemployment Rate	3.8%
Average Hourly Earnings	0.3% (4.1% Y/Y)
Average Weekly Hours	34.3
Participation Rate	62.4%
Factory Orders	0.2%
Michigan Sentiment	78.9

Source: tradingeconomics.com

As well, the BLS will be releasing their annual revisions to their data, so everything will be a mess.  However, traders, and trading algorithms, only ever look at the headlines.  The fact that 11 of the past 12 NFP numbers have been revised lower over time seems not to be a major concern to investors, although it is certainly not a positive signal for the economy writ large.

In the end, we are all beholden to this data point and the market’s reaction function.  Based on what we have seen since the FOMC meeting I would suggest that a weak number will be seen as risk-on because it will encourage more rate cut talk and bring March back into view.  (FYI, the current probability of a March cut according to the futures market is 34.5%.  Sub 100K and I would look for that to go back to 50% at least.)  At the same time, a strong print, > 200K, and I expect a risk-on response as it will encourage the earnings growth story and reduce the probability of a recession.  In fact, after the strong earnings reports from Meta and Apple last night, the only way I think we see a risk-off outcome today is if NFP is sharply negative, enough so it forces people to put recession back on their bingo cards.  We shall see.

In the meantime, a quick look at the overnight session shows that Asian equity markets are back on the buy Japan / sell China train with the CSI 300 falling to its lowest level since 2019 as investors remain unimpressed by Xi’s efforts to fix things in China.  But away from China, the rest of the markets in Asia all had good session, up between 0.5% and 1.5%.  In Europe, green is the theme as well with every market higher on average by 0.7% or so.  Not surprisingly given the earnings reports, US futures are green as well, with the NASDAQ +1.0% at this hour (7:10).

Bond markets are all over the map this morning.  Treasury yields are unchanged from the closing level yesterday, although they bounced 5bps from that intraday low print mentioned above.  As to European sovereigns, yields have edged higher by 1bp-2bps on the continent although UK Gilts are higher by 6bps which is a bit strange given the BOE yesterday seemed far more dovish than many expected.  While leaving rates on hold, they explained they expected inflation to temporarily get back to their 2% target in Q2 before bouncing a bit, and the vote included one vote to cut rates, 6 to maintain and 2 to raise, a more dovish tilt.  And yet here we are, with Gilts selling off.  If you were interested, JGB yields have fallen as well, down 2bps and falling away from any ideas of policy changes in Tokyo.

Oil is little changed this morning after getting crushed yesterday on unconfirmed rumors of a cease-fire in the Israel-Gaza conflict.  It seems the betting is that if there is a cease-fire, the Houthis will stop attacking ships in the Red Sea and things will improve everywhere.  However, as of yet, no cease-fire has been reached.  As to the metals markets, gold is little changed after a more than 1% rally yesterday, while both copper and aluminum are softer this morning, although the movements have been small and may be meaningless.

Finally, the dollar is a bit softer this morning with AUD (+0.5%) the leading G10 gainer on the back of the ASX 200 reaching a new all-time high closing level overnight.  But the movement here is broad and shallow, most currencies are a bit stronger vs. the dollar, but that 0.5% move is the largest by far.  My take is that as long as US yields remain under pressure, the dollar will be on its back foot as well.  Hence, a strong NFP this morning could see yields bounce and the dollar along with it.

And that is all we have today.  It has been quite a week between the QRA, the FOMC and Powell presser and now today’s NFP.  While there was a great deal of uncertainty as the week began, at this point, it seems clear that the market has decided that rates are coming lower regardless of what Powell has to say.  We have yet to hear from any other Fed speakers, although I imagine we will be getting a full dose next week.  And Sunday night, on 60 Minutes, Powell will be interviewed so that will be closely watched for any clues.  Until then…

Good luck and good weekend

Adf