For most of this week, the bond market did the talking. The 10-year Treasury yield climbed to its highest level since 2002, and traders were betting the Fed would raise rates again as soon as this month.
Then two reports changed the conversation. The PCE inflation report came in cooler than expected on Wednesday, and Friday’s jobs report showed hiring stalled in September. The data provided some needed clarity for the markets as yields fell and stocks rose to close out the week.
The Jobs Report
The economy added just 29,000 jobs in September, well short of the roughly 85,000 economists expected. The unemployment rate ticked up to 4.2% from 4.1%.
The revisions were just as telling. July and August were cut by a combined 60,000 jobs, and July now shows a small loss. Over the past three months, the economy has added only about 50,000 jobs a month.
Most of the gains in September came from health care and manufacturing, while financial firms kept cutting. Wages rose just 0.1% for the month and 3.0% over the past year. With prices up 3.4%, paychecks are falling behind inflation, and that’s a real squeeze for households.
PCE Inflation
The Fed’s preferred inflation gauge was the good news of the week. Prices rose 3.4% over the past year in August, below the 3.7% economists expected. Core inflation, which strips out food and energy, came in at 3.0%, also better than expected.
Fed officials didn’t celebrate. Minneapolis Fed President Neel Kashkari said, “Inflation is still too high,” and one good month doesn’t make a trend.
The same report showed something worth watching. Spending jumped 0.9% in August while income rose only 0.2%, pushing the saving rate down to 4.1%. Consumers are spending more than they earn and dipping into savings to do it.
Manufacturing
Factories are still growing. The ISM Manufacturing Index came in at 54.5, and anything above 50 means expansion.
The concern is costs. The prices factories pay jumped sharply in September, and not a single category of materials got cheaper. Higher costs at the factory tend to show up in store prices a few months later.
The Fed and the 10-Year Treasury
The Fed raised rates in September for the first time since 2023, and most officials signaled one more hike before year-end. This week, the bond market tested that view.
The 10-year Treasury yield hit 5.33% on Thursday, its highest level since 2002. However, I think higher yields are possible as the momentum in the chart below of 10-Year yields could easily take us up to the mid-5% range. One caveat is that an extended 5th wave could get us up to 6.18%.
After Friday’s report, the odds of an October rate hike fell sharply. I think October is off the table. December is a maybe, and it depends on whether inflation keeps cooling and how much more the job market weakens.
In either case, the data this week indicates the front of the curve has room to fall in yield as it has priced in a worst-case scenario of Fed policy in the coming six months.
The Stock Market
Semiconductor manufacturer Micron reported its earnings on Wednesday and affirmed that demand remains very strong within the ongoing AI trade. In the coming three weeks we will be getting a slew of earnings reports for Q3 where the S&P 500 profits are tracking for a third straight quarter of 25%+ growth.
In the chart below, stock prices continue to consolidate and trade within a range which makes for a boring and choppy intra-day tape. However, this is also price behavior that precedes the continuation of the current uptrend.
Putting It Together
The economy is sending mixed signals. Inflation is cooling for consumers but heating up at the factory. Hiring has slowed to a crawl, yet people keep spending by dipping into savings.
For the Fed, Friday’s jobs report bought some time. October is likely off the table. December is still a maybe, and the next round of inflation and jobs data will decide it.
For investors, 5% Treasury yields are a real alternative to stocks for the first time in nearly two decades. I’ll be watching whether earnings season can justify stock prices at these levels.
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President, Kisco Capital
