Yields & Rate-Hike Odds Spike As Jobs Data Forces Fed To Remain Hawkish

After a week of bloodbathery in labor market data, the ‘big one’ was a nothingburger of sorts relative to expectations – in fact more hawkish-leaning with record low black unemployment and prime-working-age participation rates back at pre-COVID levels.

As Academy Securities’ Peter Tchir noted: 

This allows/forces the Fed to remain on the “hawkish” side of things:

• 3.5% unemployment is almost the lowest it has been since they started hiking, so the “jobs for inflation fighting” argument has not materialized.

• 0.3% wage growth is “only” 3.6% annualized (ignoring rounding), which is getting into the comfort zone, but not as good as last month’s number and this Fed is likely to want to beat down any re-emerging pressures.

You could probably craft a “Goldilocks” scenario around this data for markets, but equally compelling, especially around current positioning, you could craft a scenario that isn’t great for markets.

The ‘relief’ news sent rate-hike odds for May soaring above 70% (from a coin toss)…

Was embraced by equity futures (though only back to barely green on the day)…

Bond yields spiked initially but are fading back now with the short-end underperforming…

The dollar’s kneejerk reaction was to spike higher but that is fading fast…

Gold is closed but bitcoin did nothing…

Tchir’s Bottom Line

• Rates. Higher yields and flatter curve. We should start pricing in more certainty of further hikes and a longer lag between them and when the Fed cuts (we are trading what the Fed will try and convince markets is necessary, not what I, or many others, think is the correct policy).

• Credit. Dull. Not looking for much movement in spreads and this market will ultimately be looking more at bank spreads and any signs of supply of credit not keeping pace of demand at the private/loan side of things creeping into the bond market side of things.

• Equities.  The whole “stocks are long duration” assets, especially high tech, mega growth companies, should experience more of a pullback. I could see banks, commodities (Russell 2000, in essence) doing better (the underperformance of Russell 2000 (IWM) versus Nasdaq 100 (QQQ) has been eye-opening. I’m leaning to the “normalization” trade in stocks where we drift slightly lower, but more of normalization between the year to data winners and year to date losers.

• I fully expect the data, on balance, to reinforce the recession is near narrative in the coming weeks (see Slowing, Slowing, Gone?) so that is why I cannot buy into any “goldilocks” theories on today’s numbers.

So now we wait for CPI…