Inside Markets — Curve Steepening

Earlier this week, we estimated the negative impact on October payrolls from hurricanes and the BA strike was ~125,000. Adding the estimated impact to October’s reported payroll gain of +12,000 payroll gives you a more accurate reading of +137,000, while removing the adjustment from November’s reported +227,000 payroll gain results in a below-trend addition of +102,000 jobs. This fuzzy estimate and the uptick in the UR should keep the Fed on track to cut in December, which is reflected with lower short-end yields. Market-based probability has the Fed cutting in December, pausing in January and then cutting again in March. The market is also priced for one more cut in Q2 and another in Q3’25 taking Fed funds to the mid 3.80’s by September.

We remain tactically bullish into year-end on US equities given positive seasonal fund flows and wide-open buyback window. We see the potential for a mid-January pause/pullback as some companies could offer less transparent guidance due to policy uncertainty. We’d look to add exposure on the supposed pullback given a currently positive macro backdrop, accommodative Fed and estimated Q1 earnings growth of +12%. Our preference is to add exposure in stocks from the S&P Midcap 400 Index (MID) where the multiple is ~16x forward estimates vs. ~22x for the S&P 500 (SPX) and Russell 2000 (RTY).