US Bond Market Week in Review: Thanks to the Employment Report, Expect Another Rate Hike
The employment report gave the Fed ample reason to raise rates at their next meeting. The headline number of 228,000 combined with a 4.1% unemployment rate are themselves ample reasons. But the internals are also strong enough for the Fed to hike.
The 3, 6, and 12-month moving averages of total employment growth all above 170,000 and appear to have stabilized this year. Because the expansion is so old, it’s very doubtful we’ll see a prolonged increased from these levels.
The top chart shows the moving averages for goods-producing sectors job growth, which is in a shorter-term uptrend. The bottom chart shows the moving averages for service sector job growth, which is a downtrend. But all three moving averages are about 100,000, which, when combined with goods sector job growth, is ample for this late stage in the expansion.
There are a few other points of relevance to the bond market.
Declining Inflation Expectations
The University of Michigan’s long-run inflation expectations (top chart) and the 10-year CMT-10-year TIPS rate (bottom) chart are both declining. The University of Michigan’s estimate has always been a bit high; it was 3-3.5% in 2012-2014 and has moved lower to 2.5%. The bond market measure is lower but probably more accurate. Either way, both have moved lower by about 50-65 basis points in the last 3-4 years, which has important ramifications for Fed policymakers.
A Flattening Corporate Yield Curve
The top chart shows the 1-3 year section of the corporate market has risen over 40 basis points this fall and is now close to a 1 year high. While the 3-5 years section of the corporate market (second from top) is still below yearly highs, it, too, has widened a bit this fall. However, the long end of the corporate market (second from bottom) is tightening. As a result, the corporate yield curve (bottom chart) is tightening along with the treasury market.