There are 23 days left before the end of calendar year 2023. That leaves plenty of time for surprises of a good or bad variety to hit the market. As far as things go we know, though, there’s really only one more big news cycle ahead, and it started today.
Work, Work, Work
No, this morning’s Bureau of Labor Statistics report wasn’t a flurry like we sometimes get, those surprises with half a million new job announcements or the lowest unemployment rate since Lyndon Johnson was president. But still – here we are, twenty months into the most draconian monetary tightening program since the early 1980s, and the economy is still shedding those jobs. 199,000 new payroll gains, to be exact, according to today’s BLS report. And, for good measure, the unemployment rate suddenly fell again, from 3.9 percent to 3.7 percent (which by the way is only 0.3 percent higher than the 3.4 percent low for this cycle, which actually matches the LBJ-era low). As always, there are various anomalies that skew the monthly numbers one way or another, a prominent one this time being the 30,000 auto industry workers who returned to work after the recent UAW strike ended. But that was public knowledge before this morning’s report, and the 199K was still 24,000 more than economists had predicted, according to FactSet, a market research company.
Further, Inflation and the Fed
Two more big-ticket events will round out this news cycle: the Consumer Price Index report next Tuesday and then the Federal Open Market Committee’s decision on interest rates on Wednesday. For the CPI report, economists are looking for a month-on-month change of 0.3 percent in core inflation (ie, excluding food and energy). That would translate to an annual core inflation rate of 4.0 percent, which is still twice the Fed’s two percent target. Investors would like to see the month-over-month number lower; The PCE inflation report that came out a few weeks ago only showed an increase of 0.16 percent month-over-month, which puts us close to that two percent year-over-year figure.
The Fed is likely to keep rates where they are. But what they say after the FOMC meeting matters a lot, because once again the bond market has been merrily on its way without hearing a single Fed official repeat the “higher for longer” mantra. As we’ve discussed in recent commentary, the bond market shuddered during November as traders revived their persistent fantasy of consecutive rate cuts in 2024.
For the bond market, there is always a pony out back
Current bond market levels indicate that investors have priced in a 1.25 percent rate cut in their outlook for 2024, a number we consider to be complete madness. Assuming a 0.25 percent cut each time, that means the Fed would cut rates five times—five! – in a year when the economy is still growing (as far as we know now), inflation is still well above target, job growth is healthy although off peak levels and, to top it all off, 2024 is an election year in which the Fed is likely to be more cautious than usual about doing anything with interest rates that could be criticized as politically favorable to one side or the other (note to the Fed: you will be criticized by politicians regardless what you do, so just do the right thing).
Why does the bond market keep doing this? We’ve seen this “fight the Fed” mentality throughout the rate-tightening cycle. All along, the Fed has meant it when it says “higher for longer.” Why will this time be different? Spoiler alert: it’s likely to be no different this time. Next week awaits.
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Editor’s note: The bullet points for this article were selected by Alpha’s research editors.