Rising Yields, Rising Pressure
The market is grappling with the notion of a new normal as Treasury yields continue to rise and Fed officials call for continued higher rates.
Atlanta Fed President Raphael Bostic, for example, said investors should be bracing for an ongoing higher-for-longer scenario. Speaking today at an event in Atlanta, Bostic said the Fed is likely to hold rates at elevated levels "for a long time.” He went on to say, “I am not in a hurry to raise, but I am not in a hurry to reduce either.”
Similarly, Cleveland Fed President Loretta Mester continues to call for at least one additional rate hike by year-end as the Fed continues to fight inflation. Speaking at an event organized by the 50 Club of Cleveland on Monday, Mester said one more hike might be needed this year. “I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred,” Mester said.
Historically high borrowing costs and an ongoing massive expansion of the government’s balance sheet has investors demanding higher compensation for longer-term risk. The 30-year Treasury yield jumped to the highest level since 2007, while the yield on the 10-year also pushed to the highest level since 2007. As of 10:56 a.m. ET, the 30-year is currently trading at 4.89%, and the 10-year Treasury at 4.75%.
While officials in Washington were able to avert a formal government shutdown, the fiscal showdown continues with the stopgap measure simply kicking the can down the road another 45 days from now. At the heart of the debate, aside allocative efficiency, is the massive growth in the country’s debt level and the arguably unsustainable trajectory.
In the third quarter, the U.S. Treasury announced a significantly larger need for funds, reportedly raising a net $1.007T through bond sales, the largest rise during a third-quarter period. Going forward, the Treasury’s growing funding needs, coupled with rising deficits amid today’s elevated rate environment has investors rethinking the longer-term risk premium.
Yesterday, the ISM Manufacturing Index rose from 47.6 to 49.0 in September, more than the expected gain to 48.6, albeit still signaling contraction (a reading below 50) for the 11th straight month.
In the details of the report, employment rose from 48.5 to 51.2, new orders increased from 46.8 to 49.2, and production improved from 50.0 to 52.5. On the other hand, prices fell from 48.4 to 42.8 in September.
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Also yesterday, the S&P Global U.S. Manufacturing PMI was unrevised at 48.9 in the final September report, the highest reading in five months, although still signaling contraction (a reading below 50).
This morning, ahead of Friday’s employment report, the number of job openings unexpectedly rose from 8.9M to 9.6M, topping all estimates and a three-month high. The quits rate, meanwhile, held steady at 2.3%, the lowest since January 2021.
Tomorrow, the ADP is expected to show that private-sector employment rose by 150k in September, down from the 177k gain the month prior. Also tomorrow, the ISM Services Index is expected to tick down one point to 53.5 in September.
The key report of the week, however, comes out Friday with the September nonfarm payrolls report. While job growth has slowed from an average pace of 399k in 2022 to 236k as of late, businesses continue to add hundreds of thousands of workers on a monthly basis. This month, headline payrolls are expected to grow 165k potentially marking a three-month low.
The unemployment rate, meanwhile, is expected to decline from 3.8% to 3.7% after rising three-tenths last month from a 3.5% pace in July.
Finally wages are expected to rise 0.3% and 4.3% year over year matching the pace the month prior.
-Lindsey Piegza, Ph.D., Chief Economist