Treasury yields continued to climb last week, as traders reassessed the path for rates. The economy was far too strong to justify the degree of rate cuts that had been priced in. Core consumer price disinflation has now stalled too. Core services (ex-energy & shelter) inflation quickened from 4.49% to 4.60% last month. The y/y (3-month moving average) for the Atlanta Fed wage tracker firmed from 4.6% to 4.7% in September too.
The reaction to the CPI report itself was muted, because initial claims (released at the same time) jumped 33k to 258k in the week ending October 5th. Around half of the increase can be attributed to the impact of Hurricane Helene. The next payrolls report for October looks certain to be weak. The impact of Hurricane Milton, the Boeing strike (rippling across the supply chain), combined with any pre-election pause in hiring, should negatively affect payrolls in October, and potentially November too.
The effects of the recent Hurricanes will make it difficult to get a clear read on the labour market over the next month or two. The Fed will likely proceed with two 25 basis point cuts at the next two meetings. But if the Fed overreacts to any temporary weakness in the labour market, this will simply set the stage for a further rise in Treasury yields in 2025.
The underlying economy remains strong. The Federal Reserve’s household debt service ratio, for example, was unchanged at 11.53% in Q2, and remains below pre-pandemic levels. With core PCE inflation settling above target, and the labour market more resilient than many had expected, stocks continue to outperform bonds. The S&P 500 closed at a record high of 5859.85 yesterday, and remains on the path towards 6,000.
