November Jobs Report
November 8, 2023
Lower bond yields as a result of disappointing data only drive equity upside when markets are in a ‘bad news is good’ phase. We expect the ‘bad news is good’ phase will remain in place until payroll growth falls below +50,000/month or turns negative. This makes the November Jobs Report on December 8 the most important major catalyst to watch.
The market has entered a brief catalyst vacuum ahead of next week’s CPI and retail sales reports. For equity markets, catalyst vacuums usually result in trend continuation, but last week’s ~6% relief rally in the SPX was almost entirely based on the sharp pullback in bond yields. Three weeks ago, we noted that longer bond yields had become detached from their underlying fundamental drivers with 10-year notes looking about 40bp too cheap. Last week was full of fundamental drivers, including softer economic data that exposed a very crowded short position in Treasury duration. Unwinding that position has resulted in a 10-year yield decline of ~45bp to 4.54%, which more accurately reflects market-based expectations on Fed rates, growth and inflation. Markets now will wait for Tuesday’s CPI and Wednesday’s retail sales data for direction on inflation. We doubt either report will deliver enough disinflation to carry 10-year yields below 4.48%, which would confirm a cycle peak in yields and likely drive further equity upside.
In our opinion, the ‘bad news is good phase’ has a limited shelf-life as tighter financial conditions erode consumer sentiment and rising interest expense curbs corporate capex. As we know, monetary tightening works with long and variable lags so the timing is imprecise. For timing, we’re partially relying on the duration of the 2/10 yield curve inversion, which has a perfect record predicting recession-driven bear markets 19-24 months after the initial inversion. The current curve inversion has been in place for 17 months and will keep our tactically bearish outlook until the bond market signals an imminent Fed pivot. In the current environment, it seems inevitable that a Fed pivot would only follow a sharp drop in economic activity and/or sudden decline in asset values. Our signal for an imminent (1-2 months) Fed pivot comes from the 5/10 yield curve breaking its downtrend at levels above +19bp.