BondsRates and credit
Strong Jobs Report Revives Talk Of Fed Hikes
October payrolls beat expectations, and commentators from Moody's to Schwab now argue over whether the Fed raises rates again; consumer prices are due Tuesday.
The bond story this morning is a debate over direction, and it is about hikes, not cuts. October's jobs report blew past expectations, and the White House's Kevin Hassett told Yahoo Finance the labour market is about as strong as it gets, while arguing that strong jobs data may not mean a Fed hike. We were given no Treasury yield levels this morning, so we read the rates picture through the data that exists. Treasurys were described as steady premarket by the Wall Street Journal.
Others read the same report as a licence to tighten. Moody's chief economist Mark Zandi told CNBC that a strong jobs number plus inflation could give the Fed latitude to raise rates. Jeff Klingelhofer told Schwab Network he expects at least two more rate hikes and does not believe the Fed will take its foot off the brake even if oil falls. San Francisco Fed President Mary Daly called the report good news for American workers, which is not a policy signal.
The data is not uniformly strong. The broad U-6 unemployment rate for October came in at 7.9% against 7.6% expected and 7.6% prior, a rise that sits oddly with a headline report described as blowing past expectations. Michigan consumer sentiment for November was 51, above the 48 expected and the prior 48, but a reading near 50 is low by any standard. A strong payroll count with rising underemployment and weak sentiment is a mixed picture, not a clean case for tightening.
The skeptical read is that every named voice has a position. Hassett works for the administration, Klingelhofer has predicted hikes, and Zandi said the Fed could, not would, raise rates. Only the Fed's own decisions count, and we have no new statement from it in the data. The Fed's balance sheet grew by roughly $2.5 billion to $6.748 trillion in the week to November 4, a small increase, and one week's gain is not a policy turn.
October consumer prices are due Tuesday, with producer prices also in the week's calendar, per FXEmpire. They are the next hard evidence on whether the hike camp has a case. China's producer price index rose 5.7% in October against 5.3% expected, a four-year high, which is a reminder that input-cost pressure is being exported. An upside CPI surprise would strengthen the hike argument and pressure technology stocks, which are already the weakest sector.
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China Producer Prices Hit Four-Year High
China's producer price index rose 5.7% in October, compared with the 5.3% economists polled by CNBC expected, a four-year high for wholesale inflation. The consumer measure slowed, so the pressure is at the factory gate and has not yet reached shop prices. That gap means Chinese manufacturers are absorbing costs or squeezing margins.
For global bond markets, the relevance is imports. A rise in producer prices in the world's largest goods exporter can feed through to the prices other countries pay, at a moment when U.S. inflation is the central question. The data do not say what drove the October increase, so we do not attribute it to energy or commodities; oil is mentioned elsewhere in this edition but the connection is not established.
Fed Balance Sheet Grows Again
The Federal Reserve's balance sheet grew by roughly $2.5 billion in the week to November 4, reaching $6.748 trillion, according to 24/7 Wall Street. The piece asks whether Americans should be worried, but the size of the increase is tiny against the total, about one-third of a hundredth of a percent, and the source itself notes that one week's gain is not a trend.
What matters is direction. A balance sheet that is growing is at odds with a central bank that is also discussing rate rises, which is why commentators bring it up. We have no data on what the Fed purchased or why, so any link to policy is speculation. The reading for credit markets is modest: no sign of a sudden reversal, and no sign of liquidity withdrawal.
Sentiment Up, Underemployment Higher
The University of Michigan's November consumer sentiment reading came in at 51, against 48 expected and 48 in the prior month. Households are less gloomy than forecast, though a reading near 50 is low by any standard. A rebound from a low base does not by itself say consumers are about to spend more.
The U-6 rate, which counts discouraged and part-time workers who want full-time jobs, rose to 7.9% in October from 7.6%, worse than the 7.6% expected. That is hard to square with a headline jobs report that economists called strong, and it suggests the quality of the jobs added is more uneven than the count. For bond traders, it is a reason not to treat the payroll beat as unambiguous.
Warsh Warning And AI Stocks
A November 7 Motley Fool headline says Fed Chair Kevin Warsh issued a six-word warning that could spell disaster for AI stocks. The dossier gives only the headline, so we do not know what the six words were, and we will not guess. What can be said is that a Fed chair's remarks are being read through the AI trade, which shows how tightly rates and technology valuations are linked.
That link is the transmission channel. Technology was the weakest sector in the latest session, and long-duration growth stocks are the ones that suffer if the market comes to expect higher rates. CPI on Tuesday will be read for both inflation and what it means for the stocks at the centre of the AI debate.
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