In the U.S. Treasury market — a crucial component of the global financial system — bond yields have surged to highs not seen since the onset of the global financial crisis. In Germany, Europe’s largest economy, yields have hit their highest level since the 2011 euro zone debt crisis. And in Japan, where interest rates are still below 0%, yields have risen to 2013 highs.
Those fiscal imbalances are giving “a lot of ammunition to the bond bears,” the hedge fund manager added, with interest rates likely to remain higher for longer.
“What you’re seeing now with the bond market is, you know, bond vigilantes are back in vogue, back from the 80s, back from the dead, and I think they’re leading the market today,” Neuhauser said.
Neuhauser’s statement echoes similar comments earlier this week from UBS Asset Management’s head of global sovereign and currency, Kevin Zhao, who said “the bond vigilante is coming back.”
The core personal consumption expenditures price index, which the Federal Reserve uses as a key measure of inflation, increased 0.3% for the month, in line with the Dow Jones estimate and above the 0.1% level for August.
Even with the pickup in prices, personal spending kept up and then some, rising 0.7%, which was better than the 0.5% forecast. Personal income rose 0.3%, one-tenth of a percentage point below the estimate.
Including volatile food and energy prices, the PCE index increased 0.4%. On a year-over-year basis, core PCE increased 3.7%, one-tenth lower than August, while headline PCE was up 3.4%, the same as the prior month.
The Fed focuses more on core inflation on the belief that it provides a better snapshot of where prices are headed over the longer term. Core PCE peaked around 5.6% in early 2022 and has been on a mostly downward trek since then, though it is still well above the Fed’s 2% annual target. The Fed prefers PCE as its inflation measure as it takes into account changing consumer behavior such as substituting lower-priced goods as prices increase.
“Although consumer prices rose faster than expected from a month ago, core inflation continues to lose speed and this report will not likely change the Fed’s view that inflation will slow in the coming months as demand slows,” said Jeffrey Roach, chief economist at LPL Financial. “Eventually, spending will moderate after several months of consumers spending more than they earn.”
This is the last inflation report the Fed will see before its two-day policy meeting next week. Traders are pricing in a near-100% chance that the central bank will announce no rate hike when the meeting concludes Wednesday, according to the CME Group.
Research from economists at Brown University, Harvard University and the U.S. Census Bureau shows that the numerous variables that define neighborhoods — such as the quality of their school districts, poverty rates and conditions that influence social capital in a community — all have lasting impacts on children’s future income. The research’s findings were presented earlier this year comparing mobility levels around the world at a World Bank conference.
While it may seem obvious that a good neighborhood may translate into better chances for success in adulthood, it also highlights that being immersed in these areas at a young age is important — and that sociological forces, while difficult to quantify, play an important role in economic prospects.
These insights could help to shift the tide against worsening rates of intergenerational mobility in the U.S. by informing policymakers as to which decisions could be the most influential in shaping upward prospects, according to John Friedman, professor of economics at Brown University and co-director of Opportunity Insights. Given the geographic span of the U.S., intergenerational mobility varies across a national scale. Yet even when focusing on just an intra-city level, mobility can differ widely between neighborhoods across the street from each other, Friedman said.
Friedman and his colleagues at Opportunity Insights research program created the Opportunity Atlas, which tracks children’s outcomes in adulthood using U.S. Census and tax data. The data shows a child can earn an average of $56,000 as an adult if they grow up in one neighborhood, versus just $33,000 if they grow up in an adjacent area.
DIRECTOR OF ECONOMIC MOBILITY POLICY AT THE WASHINGTON CENTER FOR EQUITABLE GROWTH
“It’s not just that exposure to these local places is incredibly important. It seems [that] exposure during childhood is the most important thing,” Friedman said.
While moving to a “better” neighborhood can shape their earnings as adults, the age at which a child moves is also critical in realizing these benefits, Friedman found. The older a child is at the time of the move, the lower their projected income at age 35. At age 24, no income gains can be measured from moving to a higher-mobility neighborhood.
Although it’s difficult to pinpoint all the various characteristics of high-mobility neighborhoods, these areas hold certain common characteristics. These include lower poverty rates, more stable family structure, greater social capital and better school quality.
“Policies tend to be more impactful in people’s trajectories when people are kids, but I don’t think there’s a sharp cut-off,” said Friedman.
There are two measures of mobility: relative and absolute. The former measures the chances of rising to the top of the country’s income distribution and has remained stable in the U.S. The latter gauges the chances that a child born into poverty rises to a higher standard of living.
“We have less [relative] mobility in this country than we do in other developed nations, especially in Europe and developing European countries. And so even though relative mobility haven’t gotten much better, or much worse over time, it is harder to move from the bottom to the top,” said Kreg Steven Brown, director of economic mobility policy at the Washington Center for Equitable Growth. “We are thought to be the country of the American dream, [where] once you start from the bottom, you move to the top. But that’s just not really what we see.”
In the U.S., there’s 13.1% average probability that a child of parents in the bottom half of the income distribution can make it to the top quartile, according to data from the World Bank. In Denmark, that probability rises to more than 20%. China, South Africa and Morocco also rank higher than the U.S.
Absolute mobility across generations has been in continuous decline in the U.S. since 1980, according to Opportunity Insights. Concurrently, economic inequality has risen over this period. While slowing economic growth compared to developing economies can be cited as a factor, the American economy is becoming relatively immobile compared to its developed-economy peers.
The “Great Gatsby Curve” demonstrates the correlation between income inequality and intergenerational earnings “stickiness.” Higher levels of income elasticity correlate to less upward mobility.
The curve shows that, compared to other developed nations such as Germany, Canada, Japan, France and Scandinavian countries, not only is wealth much more concentrated amongst a small group in the U.S. — there is also less upward mobility.
Possibilities from education
Inequality and mobility remain tricky subjects for economists to measure. Collecting data sets that span over a generation is difficult, and with so many social factors at force — racial segregation, gender, education, household structure, environment — identifying causation, correlation and confounding variables in a study continue to pose challenges.
“It’s really hard to know what works, because we don’t really have the time to wait a generation to see if [a] particular intervention designed in [a] way actually made the change you want to see,” said Brown.
However, education has been underscored as one of the greater openers toward greater mobility.
“One of the biggest equalizers, or mobility-enhancing policies, that you can do is to you provide good-quality education without a burden of debt,” said Juan Palomino, a research scholar at Universidad Complutense de Madrid.
Education also stands out because of all the pre-existing policy applications that can directly improve quality and resource allocation relative to other factors, Friedman added. “It’s a policy area that’s very impactful, and there’s also a lot of policy levers that one could pull that would increase, kids’ long-term outcomes.”
The U.S. only ranks behind England for having the world’s highest university tuition fees, according to data from the OECD. Tuition and fees have also more than doubled over the last 20 years and outstanding student loans total $1.75 trillion, as of the third quarter of 2021.
Friedman noted that while improvements could be made to the U.S. financial aid system. Data on aid awards from the Susan Thompson Buffett Foundation given to Nebraska high school graduates showed only about an 8% increase, from a base of 62%, in the fraction of people who went to a four-year college.
Notably, the Biden Administration’s student loan forgiveness plan was struck down by the Supreme Court in June, denying millions of borrowers the chance to have their debts reduced.
“College is much more expensive than it used to be, but it remains [about] the single best investment most people can make,” said Friedman.
The conflict ramped up on Monday, after Israeli military said it had widened its ground offensive in Gaza as it continues its assault in response to the Oct.7 terror attacks by the Hamas militant group.
El-Erian, who is chief economic advisor at Allianz, said that the longer the fighting continues, the greater the chance that it will escalate into a regional conflict with implications for global financial markets.
“The longer this conflict goes on, the more likely it will escalate,” el-Erian told CNBC’s Dan Murphy during a panel session at the AIM Summit in Dubai.
“The higher the risk of escalation, the higher the risk of contagion to the rest of the world in terms of economics and finance,” he continued.
El-Erian said that such contagion would compound the already pervasive issues facing the global economy, including stagnating growth, stubbornly high inflation and the broader fragmentation of markets.
“This conflict, in a way, amplifies all of the challenges that existed and that were already significant,” he said.
The impact on global markets in response to the onset of the war was initially limited, as investors first assessed that the conflict was contained. However, the prospect of a regional spill-over pulling in other players, such as Iran and Lebanon, has added to a sense of unease in markets.
Oil has been particularly volatile, amid concerns that an escalation could restrict supply from the energy-rich region. Oil prices surged on Friday, after Israel said its troops were expanding their ground operation, but dipped on Monday, as investors looked ahead to the Federal Reserve’s monetary policy meeting of Wednesday.
Kristalina Georgieva, head of the International Monetary Fund, on Wednesday dubbed the worsening Israel-Hamas conflict as another cloud on the horizon of an already gloomy economic outlook.
“It is terrible in terms of economic prospects for the epicenter for the war,” she said. ”[There will be] negative impact on the neighbors: on trade channels, on tourism channels, cost of insurance.”
The Oct. 7 terror attacks perpetrated by Hamas came as Israel had been making moves to normalize diplomatic ties with its Arab neighbors, including Saudi Arabia.
Asked what the ongoing conflict means for those ambitions, el-Erian said that the prospect had grown both more bleak and more pressing.
“People are watching this and are feeling a sense of despair that I have not seen before,” he said.
“The longer it [the conflict] continues, the more your question is going to become relevant, and it should really be asked to the policymakers.”
El-Erian’s comments mirror those made last week by the president of the World Bank, Ajay Banga, who told CNBC that the conflict had made the goal of regional cooperation in the Middle East much more difficult.
“We were working towards a more peaceful Middle East and many countries in this region have begun to speak to each other about the opportunity of moving forward with a new platform of being together,” Banga said Tuesday. “I think it’s clearly going to be a little while until this sort of works out one way or the other.”
In a closely watched announcement Monday afternoon, the U.S. Department of the Treasury said it will be looking to borrow $776 billion, which is below the $1.01 trillion in privately held marketable debt the department borrowed in the July-through-September period, the highest ever for that particular quarter.
The borrowing level appeared to be somewhat below Wall Street expectations — strategists at JPMorgan Chase said they expected the announcement to be around $800 billion.
When the Treasury announced in July its heightened borrowing needs, it set off a frenzy in the bond market that saw yields hit their highest levels since 2007, the early days of what would become a global financial crisis.
Stocks lost some of their gains but still remained strongly positive after the announcement. Treasury yields were mostly higher.
Markets have been concerned about the effect of higher yields, and the government’s borrowing need, as well as restrictive Federal Reserve policy, have exacerbated those concerns.
Officials attributed the lower borrowing needs to higher receipts, which were offset somewhat by greater expenses.
The Treasury said it expects to borrow $816 billion during the January-through-March period, which is the government’s fiscal second quarter. That number appeared above Wall Street estimates, as JPMorgan said it was looking for $698 billion. The record for quarterly borrowing happened in the April-through-June stretch in 2020, when borrowing hit nearly $2.8 trillion during the early Covid-19 pandemic days.
The department said it expects to maintain a $750 billion cash balance for both quarters.
Markets will be watching a Wednesday refunding announcement from the Treasury, which will detail the size of auctions, the duration being issued and their timing. Later that day, the Federal Reserve will conclude its two-day policy meeting, with markets overwhelmingly expecting the central bank to hold interest rates steady.
The Monday announcement comes 10 days after the government said the fiscal 2023 budget deficit would be about $1.7 trillion. That was an increase of some $320 billion from the prior year.
An accompanying economic summary indicated that growth has remained strong while inflation has cooled, even though it is well above the Federal Reserve’s target. However, the statement indicated that growth is likely to decelerate sharply, falling to 0.7% in the fourth quarter and just 1% for all of 2024.
There’s virtually no chance policymakers will make a move either way on interest rates. Recent data has bought Fed officials time to decide their next step. Inflation, while decelerating, is still too high, and the economy is growing at a solid pace despite the highest benchmark interest rates since the early part of the century.
What investors will watch, instead, are the signals that come from Chair Jerome Powell and the rest of the Federal Open Market Committee about where they’re leaning for the future.
“There’s no likelihood that the Fed will do anything here. It wouldn’t make sense at this meeting. But, what is the messaging?” said Josh Emanuel, chief investment officer at Wilshire. “My sense is that Powell is going to want to be very measured and careful about sounding too hawkish. He’s managed to thread the needle here very well.”
Despite the chair’s efforts to walk a line between holding tough against inflation while being attuned to the impact higher interest rates have on the economy, markets have been sensitive.
“The last thing Powell wants to do here is make a mistake and come across as too hawkish, because the implication of that as you could see a risk-off environment. You’ve already started to see a little bit of a technical breakdown in equities,” Emanuel said. “And you have a market that is very, very short Treasurys.”
In fact, markets will have a dual focus Wednesday. Earlier in the day, the Treasury Department will provide more information on its funding needs in the near future, in what could be a pivotal moment for investors with a keen focus on how the government manages its $33.7 trillion debt. Also on tap Wednesday: the Labor Department’s report on job openings in September, and ADP’s estimate on private payroll growth.
That all happens two days before the Labor Department issues its nonfarm payrolls report for October, and comes on the heels of a report showing better-than-expected economic growth in the third quarter but a likely slowdown ahead.
“The Fed will likely hold rates steady despite accelerating GDP and employment,” Bank of America credit strategists said in a client note. “The Fed has adopted a more cautious tone due to the [Treasury] long-end rate rise, arguing rates markets have done some of its tightening. At the press conference, Chair Powell will likely reiterate that the Fed is ‘proceeding carefully.’”
The bank added that it expects Powell’s post-meeting statement so “largely mirror” remarks he made in New York earlier in October. In that speech, Powell said he considered inflation to be still too high and cautioned that the Fed, while being able to move carefully, was attuned to possible upside risk to inflation.
David Doyle, head of economics at Macquarie Group, said Powell’s comments “may be more market moving” than the FOMC statement, adding that markets will be watching for the chairman’s views on the movement in Treasury yields. He also noted that the Fed by now will have seen the quarterly senior loan officer survey that gauges how tight lending conditions are at banks.
For its part, the market is pricing zero chance of a rate hike at this meeting and just a 29% probability of an increase in December, according to the CME Group’s FedWatch measure of futures pricing. Traders see the first cut possibly coming in June.
However, some market participants think the Fed’s hands could be forced into another hike as inflation hangs tough.
The Fed likely “will not signal that it is done tightening policy just yet,” said Matthew Ryan, head of market strategy at Ebury.
“We still see another U.S. rate increase as unlikely in the current cycle,” he said. “As a compromise, we think that the Fed will stress that rate cuts are not on the cards anytime soon, with easing to begin no sooner than the second half of 2024.”
From a sector standpoint, education and health services led with 45,000 new jobs. Other notable gainers included trade, transportation and utilities (35,000), financial activities (21,000), and leisure and hospitality (17,000).
Almost all of the jobs came from services-providing industries, with goods producers contributing just 6,000 toward the total.
Firms employing between 50 and 499 workers contributed the most, with a gain of 78,000.
“No single industry dominated hiring this month, and big post-pandemic pay increases seem to be behind us,” said ADP’s chief economist, Nela Richardson. “In all, October’s numbers paint a well-rounded jobs picture. And while the labor market has slowed, it’s still enough to support strong consumer spending.”
The release comes two days ahead of the Labor Department’s official nonfarm payrolls report, which is expected to show an increase of 170,000 and includes government jobs, unlike ADP. The counts from ADP and the government can differ substantially, as they did in September when the Labor Department reported a gain of 336,000, more than three times the ADP estimate.
Job openings totaled 9.55 million for the month, just slightly above the downwardly revised August number. Markets had been looking for a total of 9.5 million, according to a FactSet estimate.
Unit labor costs, a measure of hourly compensation against productivity, fell 0.8% for the July-through-September period at a seasonally adjusted rate. Economists surveyed by Dow Jones had been looking for a gain of 0.7%. On a 12-month basis, unit labor costs increased 1.9%.
That increase in productivity also was more than expected, beating the Dow Jones estimate for a rise of 4.3% for the biggest quarterly gain since the third quarter of 2020. Output climbed 5.9%, while hours worked rose 1.1%.
The developments come as the Federal Reserve is seeking to tamp down inflation through a series of interest rate increases.
On Wednesday, Fed Chair Jerome Powell said wage gains “have really come down significantly over the course of the last 18 months to a level where they’re substantially closer to that level that would be consistent with 2% inflation over time,” the central bank’s target.
In other economic news Thursday, initial filings for unemployment benefits for the week ended Oct. 28 totaled a seasonally adjusted 217,000, up 5,000 from the previous period and higher than the 214,000 estimate, the Labor Department said in a separate report.
Continuing claims, which run a week behind, totaled 1.82 million, an increase of 35,000 and higher than the 1.81 million FactSet estimate.
Aside from the long-standing calls for a recession to hit the U.S., the expectation for a hiring retreat is probably the most oft-heard — and, so far, incorrect — economic call of at least the last year.
True to form, the consensus Wall Street call is that the October nonfarm payrolls report, which the Labor Department is scheduled to release Friday at 8:30 a.m. ET, will show a sharp decline from September. Economists surveyed by Dow Jones are expecting growth of just 170,000, down from the shockingly high 336,000 the previous month and well below the 260,000 monthly average so far in 2023.
Don’t hold your breath looking for that big of a decline, said Amy Glaser, senior vice president at global staffing firm Adecco.
“This is going to be another surprising month. We’re still seeing resilience in the market,” Glaser said. “We’re still seeing a ton of positivity on the ground with our clients.”
Though long-standing trends such as aggressive job switching and big wage gains now show signs of reversing, hiring is still strong as employers look for incentives such as flexible work scheduling to bring in new talent, she added.
“Folks aren’t able to jump from one job to another and gain these huge, astronomical pay increases, which is good news for the employers,” Glaser said. “On the flip side, we’re seeing a return of the workforce … The folks coming off the bench are really going to make an impact over the upcoming months.”
Trends in labor force participation will be one metric worth watching closely when the report hits, as the participation rate is still half a percentage point below its pre-pandemic level. Here are a few more:
Average hourly earnings
Wages increased 4.2% from a year ago in September. That is expected to decrease to 4% for October. The earnings picture is an important component to inflation, and one policymakers will be viewing with a careful eye.
The Dow Jones estimate is for a 0.3% monthly gain, after rising 0.2% in September. Federal Reserve officials have said they don’t think wages have been the key driver of inflation, though Chair Jerome Powell said Wednesday that the labor market could emerge as a more significant factor ahead.
“In recent months, firms are hiring relatively more part-timers, indicative of the uncertainty in near-term business conditions,” said Jeffrey Roach, chief economist at LPL Financial.
Indeed, a potentially important trend has been the hiring of part-time workers in recent months. Since June, their rolls have swelled by 1.16 million, according to Labor Department data. Conversely, full-time positions have dropped by 692,000.
“Employers are creating more part-time opportunities that are bringing in players off the bench,” Glaser said. “There’s still a bit of caution on the side of employers, and they’re choosing to open part-time roles in this wait-and-see mentality.”
While the rise in the jobless rate over past months has generally flown under the radar considering how historically low it is, the level actually is approaching a potential danger zone.
An economic premise known as Sahm’s Rule states that recessions happen when the unemployment rate’s three-month average runs half a percentage point above its 12-month low. The current rate of 3.8% is 0.4 percentage point above the recent low last seen in April.
“Most investors expect additional deterioration in the job market before we see a meaningful deceleration of inflation,” Roach said.
Close to half a million American workers have gone on strike in recent months. While a number of those high-profile stoppages have been resolved, some of the activity will show up in the October jobs report.
Specifically, the Bureau of Labor Statistics is estimating that about 30,000 striking United Auto Workers will subtract from last month’s count, posing potential downside risks for the report.
Homebase, which compiles widely watched high-frequency data on employment trends, said the jobs market generally is turning lower.
The firm’s database indicates that employees working declined 2.4% in October, computed on a seven-day average using January as the baseline. Hours worked, another important metric, fell 2%, Homebase said.
Nonfarm payrolls increased by 150,000 for the month, the Labor Department reported Friday, against the Dow Jones consensus forecast for a rise of 170,000. The United Auto Workers strikes were primarily responsible for the gap as the impasse meant a net loss of jobs for the manufacturing industry.
The unemployment rate rose to 3.9%, the highest level since January 2022, against expectations that it would hold steady at 3.8%. Employment as measured in the household survey, which is used to compute the unemployment rate, showed a decline of 348,000 workers, while the rolls of the unemployed rose by 146,000.
A more encompassing jobless rate that includes discouraged workers and those holding part-time positions for economic reasons rose to 7.2%, an increase of 0.2 percentage point. The labor force participation rate declined slightly to 62.7%, while the labor force contracted by 201,000.
“Winter cooling is hitting the labor market,” said Becky Frankiewicz, chief commercial officer at staffing firm ManpowerGroup. “The post-pandemic hiring frenzy and summer hiring warmth has cooled and companies are now holding onto employees.”
Average hourly earnings, a key measure for inflation, increased 0.2% for the month, less than the 0.3% forecast, while the 4.1% year-over-year gain was 0.1 percentage point above expectations. The average work week nudged lower to 34.3 hours.
The Fed uses wage data asone component of its inflation watch. The central bank has opted not to raise interest rates at its past two meetings despite inflation running well above its 2% target. Following Friday’s jobs data, markets further reduced the probability of a rate hike in December to just 10%, according to a CME Group gauge.
Markets reacted positively to the report, with futures tied to the Dow Jones Industrial Average adding 100 points.
From a sector standpoint, health care led with 58,000 new jobs. Other leading gainers included government (51,000), construction (23,000) and social assistance (19,000). Leisure and hospitality, which has been a top job gainer, added 19,000 as well.
Manufacturing posted a loss of 35,000, all but 2,000 of which came because of the auto strikes. Transportation and warehousing saw a decline of 12,000 while information-related industries lost 9,000.
“After years of incredible strength, the labor market could finally be slowing. The topline miss, plus downward revisions and higher unemployment, deliver a strong message to [Chair] Jerome Powell and the Fed,” said David Russell, global head of market strategy at TradeStation. “Further tightening is now highly unlikely, and rate cuts could be back on the table next year.”
In addition to the October slowdown, the Bureau of Labor Statistics revised lower its counts for the previous two months: September’s new total is 297,000, from the initial 336,000, while August came in at 165,000 from 227,000. Combined, the revisions took the original estimates down by 101,000.
Job creation skewed heavily to full-time workers, reversing a recent trend. Full-time jobs grew by 326,000, while part-time tumbled by 670,000 as summertime seasonal jobs wrapped up.
Following a third quarter in which gross domestic product expanded at a 4.9% annualized pace, even better than expected, growth is projected to slow considerably. A Treasury report earlier this week put expected fourth-quarter GDP growth at just 0.7%, and 1% for the full year 2024.
Fed policymakers have deliberately tried to slow the economy in order to tackle inflation. On Wednesday, the Fed’s rate-setting committee chose to hold the line for the second consecutive meeting after a series of 11 hikes since March 2022.
Markets expect the Fed is likely done raising, though central bank officials insist they are dependent on incoming data and still could hike more if inflation doesn’t show consistent signs of falling.
Inflation data has been mixed lately. The Fed’s preferred gauge showed the annual rate fell to 3.7% in September, an indication of steady but slow progress back to its goal.
Surprisingly strong consumer spending has helped propel prices higher, with solid demand giving companies the ability to charge higher prices. However, economists fear that rising credit card balances and increased withdrawals from savings could slow spending in the future.
