Go to the Beach

Go To The Beach

Nonfarm Payrolls May 2024.

The markets waited all week for Friday’s payroll number which showed +272k jobs were created in May which was well above expectations of +180k. The unemployment rate ticked up to 4% but the big picture is that there is no problem with the job market right now. The biggest issue is finding the right workers which is frustrating but a byproduct of a growing economy (good).

However, the markets were disappointed on Friday as a stronger labor market encourages the Fed to push rate cuts down the road. For now, the healthy jobs market means that the Fed will be on hold for the June/July meetings and the September meeting is being priced in the rates market at 50/50.

Next Week and the Fed Meeting

One thing I will be watching on Wednesday is for any discussion regarding the size of the Fed’s holdings of US Treasury bonds and Mortgage Backed Securities. If you remember, the Fed will be slowing the pace of selling bonds from their $7T balance sheet in the coming months. This is a form of taping the brakes on their hawkish policy so you could interpret that as a form of a minor rate.

Assets owned by the Fed.

This means the messaging next week will set us up for the rest of the summer as the data is suggesting there is no reason to cut rates. They could continue to tweak the size of the balance sheet but it seems like Fed policy will be on the beach until after Labor Day.

The 10Yr Treasury Yield

Rate volatility is likely to pick up in this environment as we saw evidence of this on Friday when the 10Yr bond rose 10bps in reaction to the payroll data. In the chart below, it is possible we saw a high on the year at 4.74% (‘B’) and that we will continue to see the 10Yr yield fall in the coming months. Why? It could be a number of reasons but if I am right we will see 4% (or lower) which would help the housing market and cool rental rates which are a large portion of the CPI number. A lot of questions still brew around the shape of the yield curve but that likely changes whenever the Fed does take rates down on the front end of the curve.

10Yr Treasury Bond

The S&P 500

The stock market has been at a high-level range for months and we are seeing an attempt at higher levels as earnings reports still look good and central banks aren’t raising interest rates anymore. The messaging from the Fed will be another significant consideration for stocks but growth is stable and the labor market remains strong.

S&P 500 by @kiscocap

In the long-run, prices need to come down and the Fed is not getting that in this environment. Perhaps, the consumer will weaken under higher levels of debt but then again a lower 10Yr yield could help rents fall and put downward pressure on the CPI. For now, many of these variables are likely to remain stable, however, the 10Yr will be the one to watch if you are working on your tan at the beach.

Paul McCarthy, President of Kisco Capital, LLC

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Paul J McCarthy III CFA

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.