The big question everybody has is...
Did yesterday's employment data change everything? The answer is NO for a few reasons
1. It is one number and subject to potential revisions.
2. The 2007 analog and the JOLTS report both suggested that a topside beat was quite likely (The JOLTS suggesting more of a beat than the analog for sure).
I covered this in my note titled The Day After Tomorrow on October 2nd.
Also, interestingly in Sept 2000 for example (our number 2 analog) the unemployment rate was expected to be unchanged at 4.1% and came in at 3.9% as NFP printed +252k (Sound familiar?-) That did not end well in early 2001 as the Fed baulked at rate cuts.
3. Our 2007 roadmap did not suggest further 50 bp moves in 2024 anyway but rather 2 more 25's and they remain very much on the cards still.
4. We still have inflation data (probably lower importance given base effect dynamics at the moment)and another employment report before the next Fed meeting.
5. We already know that the NFP numbers have been "suspect at best" with the revisions we saw for April 2023-March 2024 as well as constant revisions lower this year.
That is all very well you might say but what about the household survey (which creates the unemployment rate) ?
That was also very solid showing that over 400k jobs were created.
Really???
I am not going to join the long line of "election conspiracy theorists". However, I am going to point out the "anomaly" below.
♫♫♫ One of these things is not like the other. One of these things just doesn't belong. Can you tell which thing is not like that other before I finish this song? ♫♫♫
Apparently 785k Government jobs were "CREATED" last month (seasonally adjusted) .That is the is the single largest print ever recorded outside of the outlier print in June 2020 (Over 1mm) after we had seen numbers plunge in the months before (Covid)
The table above compares this print to a smaller subset of September in the past 4-years as well as the past 4 election years (2008/2012/2016/2020).
I have left it to Big Bird above to reflect on that discrepancy.
Outside of this anomaly we were looking for yields to continue higher and curves to flatten further on the back of a better number and that is what we got.
Using the 2007 analog that would suggest that this move could continue into the middle of the month and potentially even see the 2-year yield close to 4% and the 2's 10's curve close to parity (So a 10 year yield close to 4% also)
I see no reason on the basis of what we have seen to doubt that this will be the case.
I lie. I see one reason. IF the Israeli/Iran standoff escalates notably (Bombing of Iranian Nuclear facilities or more likely oilfields) that is a material escalation that
1. Would change things
2. Is different to 2007 but could create a similar market reaction to what we saw in 2007 i.e. a surge in the Oil price.
Both Brent Crude and WTI posted bullish outside weeks last week.
If nothing happens this weekend (Monday is the 1-year anniversary of the Hamas attack) then Oil may give back some of the gains seen late last week but that danger (higher prices) gets delayed not reversed. The danger remains of a material move higher in Oil as we head into Q4, just as we saw in Q4,2007.
This move, if it comes, is not demand driven so it will be a drag on the Global economy at a time when Japan, China, Eurozone, UK are already revising lower their economic outlooks.
If an attack as mentioned above does happen, I think it will curb the up move in yields and likely feed back into equity markets earlier.
In 2007 the Equity market peaked and turned on 11 Oct and the bond market on 15 Oct.
So, we are entering the "Twilight Zone" when it comes to these overlays staying intact or not.
For now, absent this development I would expect yields to continue higher towards the targets mentioned above over the course of next week. After that it will be a work in progress.
