Rates Pull Back From 2023 Highs After Mixed Labor Data

Mixed labor data sees rates…plummet? Data released in the morning presented a mixed picture of the U.S. labor market, with jobs growth failing to meet estimates while average hourly earnings came in above expectations. While the report seemed neutral, the market said otherwise as swap rates rallied 10+ bps across the curve. Given the significant bear steepening going into this print, the rally may say more about positioning than any real view that the labor market is weakening. The 2-year UST yield ultimately fell 12bps to 4.76% while the 10-year UST yield dropped over 14bps to 4.03%.

Soft-landing camp scores points from stabilizing labor growth. Nonfarm Payrolls’ (NFP) downward trend this year (briefly interrupted in March) continued in July at levels near June’s downwardly revised figures (187k vs 185k). The unemployment rate fell, but it’s been roughly in-line with the 2019 boom-times (~3.5%) and is trending upward this year. Wages grew which is inflationary, but some point to increased labor productivity as an offset (pay is going up, but they are producing more). Takeaways? The Fed’s Bostic and Goolsbee agreed that slower, but not stalling, growth means the Fed should now ask how long to hold rates high, instead of high they should go. Service sector hiring also appears to be slowing, and as a key inflation driver (special emphasis here from Chair Powell), this is an encouraging sign. The soft-landing narrative seems to be picking up all the right data points lately.  

Week ahead. An inflation week looms, as CPI (Thursday) and PPI (Friday) are both on the slate. Headline YoY CPI is expected to increase to 3.3% in July from 3.0% in June, while the headline MoM level is expected to remain flat at 0.2%. Both MoM and YoY headline PPI figures are expected to increase from last month to 0.2% and 0.7%, respectively.