Yielding to the Inevitable
Following a weaker than expected job openings report, the futures market increased the probability for a rate cut at this month’s FOMC meeting to 95%. The weak data supports the case for a rate cut, as it shows a softening labour market with a broad-based rise in layoffs across many sectors, including construction, manufacturing, and transportation, rising to the highest levels in a year. It aligns with the Fed Governor Waller’s comments that the central bank should implement multiple additional cuts in the coming months, given that he expects inflation to approach the central bank’s target within the next six to seven months.
In another signal of a slowing US economy, the Fed’s Beige Book, released yesterday, reported that economic activity was flat or declining across most of the country. This slowdown is largely attributed to households cutting back on spending as wages fail to keep pace with rising prices. The report noted that nearly every region is experiencing price increases, with tariffs being a significant driver of higher costs for businesses, which are in turn being passed on to consumers. Furthermore, the report highlights a softening labour market, with employment levels seeing little to no change in most districts and several regions reporting a reduction in immigrant workers. This data reinforces the argument for the Fed to ease monetary policy, indicating that the economy is cooling more than previously thought.
Bond yields rallied following the weaker jobs data and a subdued Beige Book, paring the losses experienced during the week's bout of volatility. The recent sell-off had pushed yields on the 30-year Treasury to an attractive ~5% level, which has historically been a good entry point to secure long-term returns. The combination of these higher yields with the growing expectation of a more accommodative monetary policy creates an appealing environment for bond investors.
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