December 5, 2023
The positive correlation between stocks and bonds breaks down today as yields move lower for the ‘wrong reasons.’ It’s just one day, but it’s important to recognize that the driver was weaker labor market data. In the short-term, bonds and stocks can have a positive correlation, but the two asset classes have a negative correlation over the longer run. Bad news on the economy can be good for equity markets as long as labor markets remain healthy, but we see the relationship breaking down once payroll growth slips below 50,000/mo.
Market based probability for rate cuts to begin in March is inconsistent with the prevailing soft-landing narrative. Assuming rate cuts begin in March fits an imminent recession narrative. The economy will need to slow meaningfully in the weeks ahead, or rate cut assumptions need to be pushed out. This Friday’s Jobs Report and next Tuesday’s CPI print will influence the present narrative, but the debate over the timing of rate cuts will largely depend on the Fed’s updated dot plot due Wednesday. The current median dot for 2024 sits at 5.125% and a downwardly revised median dot is required to keep the soft-landing narrative in place.