Labor Market Data
December 7, 2023
Labor market data should become a bigger input for Fed policy expectations going forward. Recent labor market datapoints have shown signs of cooling job and wage growth, while a pickup in layoff announcements adds some interest. Consensus for tomorrow’s Jobs Report is also a small increase in payrolls, mostly due to the end of the UAW strike, and an unchanged Unemployment Rate (UR) of 3.9% and average hourly earnings up +0.3% MoM or +4% YoY. A larger-than-expected payroll gain above +250,000 would put upward pressure on bond yields, resulting in equity downside. Last month’s increase in the UR came very close to triggering the Sahm rule, which suggests a recession if the three month average of the UR rises 50bp from a 12-month low. A November UR of 4% or higher would trigger the rule and increase concerns for an imminent recession. Wage growth that exceeds 4% YoY would likely result in higher bond yields, but yesterday’s upwardly revised Q3 productivity number and downside revision to unit labor costs have largely de-risked this component of the report. And 4% YoY wage growth is getting closer to the longer-term average of ~3.5%.
Ten-year bond yields of 4.11% are near key support at ~4.02%. While it’s not our expectation, a break below 4.02% would likely accelerate the pullback in yields. Ten year yields are also trading slightly below most estimates of implied ‘fair value’ using fundamental drivers including Fed policy expectations, inflation expectations and forward GDP estimates. Japanese markets pricing in the removal of negative interest rates should keep near-term upward pressure on yields along with Treasury supply/demand dynamics and ongoing QT operations. Combined, these factors should keep 10-year yields above 4.02% with a near-term target of ~4.45% and more a compelling opportunity to add bond duration.