Labor is Still Red Hot

Volatile week ends with yields up on strong labor data, equities buoyed by rebounding bank stocks. Risk appetite sent yields up across the curve today following unexpectedly hot labor data that fueled June rate-hike bets and eased some concerns about a near-term economic downturn. The 2-year ended the day up ~12bps at ~3.91%, and the 10-year was up ~6bps at ~3.44%. Equities were up on the day, led by regional bank stocks, however some are partially attributing the rally to short-covering activity. PacWest climbed ~80% today, and WAL was up ~49%. The S&P was up 1.85%, and the NASDAQ was up 2.25%. Overall, the week was marked by elevated volatility with the VIX climbing to its highest level since March on Thursday.       

Strong labor data punctuates Fed’s challenges. Payroll and wage growth far-exceeded expectations for April, signaling continued inflationary pressures. Job growth was broad-based, with increases in the healthcare, professional and business services, leisure, and hospitality categories. The data print complimented other recent hawkish indicators that may force the Fed to hike further:

• March had the highest consumer borrowing increase in 4-months
• Increase in bank lending driven by the largest rise in small-bank lending since December — per recent H.8 data for the week ended April 26th 

The Fed’s Bullard echoed this sentiment today, saying that rates will probably have to go higher to achieve 2% inflation. 

Week ahead. Markets have a lot to digest after this eventful week. Next week’s data includes CPI on Wednesday, PPI on Thursday, and University of Michigan Consumer Sentiment on Friday.