Friday’s payrolls report belies a softening trend in the labour market. The details of the report (together with forward-looking job market indicators) suggest we may have reached an inflection point. The job market is stalling; wage growth should begin to ease.
This may have been why the bond market ultimately shrugged off the November payrolls. The 10-year Treasury yield spiked by as much as ten basis points straight after the release but ended up finishing the day two basis points lower (3.51%).
However, the Fed is not in a position to provide a nuanced reading of the payrolls report just yet. Put simply, the inflation numbers are still too high and the unemployment rate too low (3.65% on U3, 6.7% on U6). And the prime-age participation rate fell for a third straight month.
This is why, despite the downturn in forward-looking indicators, the Fed will continue to stress it will maintain rates higher for longer.
Real yields are sliding across the curve, back down towards 1%. The 30-year inflation-indexed yield tumbled 14 basis points on Friday to 1.15% (-27 basis points on the week).
But 1% real rates may be a floor for this Fed, in its bid to conquer inflation. The economy will have to adapt to higher real rates >1% for the duration of 2023, which could continue to weigh on some asset classes such as commercial real estate.
