Treasury yields rose further after September’s payrolls report, and have more room to climb, as markets reassess the Fed’s terminal rate in the face of a strong labour market and solid growth. The jobless rate fell to 4.05% in September, and is now below the FOMC’s median longer run estimate of the U3 rate (4.2%), and even further below the projections for Q4 2024 (4.4%) and Q4 2025 (4.4%).
Correlations are there to be broken: leading indicators that were useful in the past, will lose their predictive value over time. The Conference Board’s Leading Economic Index, is one example. Temporary help services employment is another. Like other heuristic measures, the Sahm Rule should be treated with scepticism too.
With core inflation still running at 2.68% in August (as measured by the core consumption deflator ex-food & energy), the bond market remains vulnerable. Indeed, bonds have been selling off since the Fed’s 50 basis point cut last month. With the US running back-to-back $2tr dollar deficits in FY24, and with neither party, nor Presidential candidate, serious about getting to grips with the public debt, bonds may continue to selloff if the Fed is too aggressive in cutting rates.
The 10-year Treasury yield breached 4% earlier today and the 30-year Treasury yield rose past 4.3%. The long bond may be giving a more accurate indication of where the neutral federal funds rate currently is.
