Wednesday was one of the strangest days I've seen in short-dated Treasuries in a long time.
Yields on the 2-Year were about 3.01% at midnight. Then, as Fed speaker after Fed speaker came out stating that we aren't at the neutral rate yet, and that more hikes are coming, it jumped as high as 3.2%. The lack of liquidity in this "easy" part of the Treasury market was absurd.
Then as the day wore on, rates rallied. The rally was led by the long end, but the 2-Year finished the day at 3.06%. The 20 basis point move higher was large, and the reversal was almost as frightening in terms of speed.
Rates, I believe, even at the front end, are being driven by concerns that the data is not going to support more rate hikes. Wednesday's move in oil, where it went lower, despite no relief from OPEC+, was helpful, but I think worries about the data go well beyond that.
The Fed's messaging is clear: No dovish pivot.
The market's response seems equally clear: We don't believe you!
Inversion Is Real and Catching My Eye
The spread between 2s and 10s is over 35 bps. That's more inverted than in 2007 and at levels we saw in early 2000. Both of those inversions preceded trouble for markets and the economy (Tech Bubble and Great Financial Crisis).
With the Fed in tightening mode (QT is ramping up), it might be difficult for the central bank to act as quickly as they did during Covid, when we last had an inversion. Additionally, you cannot expect Washington to deliver stimulus like they did during Covid, at least not right away, if I'm correct and the economy is more fragile than the market is pricing in.
Inventories Are My Single Biggest Concern
I will get to jobs in a moment, but I think inventories is something everyone needs to be paying attention to.
Inventories have been building for almost a year now. Usually, you see an upward slope, but the pattern is build, sell down, build, etc. For a year now we are not seeing any drawdown.
We have more inventories than would be expected at a normal growth rate AND I see evidence that supply-chain bottlenecks are still easing, which is likely to increase inventory.
Jobs
This brings us to jobs. With the July non-farm payrolls report looming Friday, jobs would be the highlight of this report, but I think market reaction to Fed speak, the curve inversion and inventories also deserve our attention.
JOLTS Data Came in Weak
While there are still 10.7 million job openings, the drop from the prior month was 600k, one of the biggest monthly declines we've seen. Also, I am suspicious that with digital hiring, etc., there may be a lot of job postings that are getting counted that are either duplicates or something no one bothered to take down.
The QUIT rate dropped back to 2.8. It had peaked at 3. The QUIT rate is an indication of how comfortable people are with the labor market. Higher QUIT rates indicate that employees are comfortable quitting because they are confident they can find similar or better employment elsewhere. 2.8 is still historically high, but it does seem to be rolling over.
Initial Claims
Initial jobless claims came in at 260k this week. That is higher than any weekly report in 2018 and 2019. Continuing claims also jumped, which may be an indication that people are having more difficulty finding a new job.
Expectations
According to Bloomberg, the consensus is for 250k jobs to have been added in Friday's jobs report. The range is 50k to 325k. I am skeptical of that estimate, primarily because the Household survey hasn't been as strong as the Establishment survey and they generally catch up to each other. We could have a strong Household number, but I'm leaning towards weak Establishment/headlines.
Bottom Line
I'm looking for a weaker-than-expected jobs report.
A week ago I would have said that slightly bad data would be good for risky assets, but after the move this week, I'm not so sure about that.
