New Data Suggest Interest Rates Could Explode Lower
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Our interest strates getting close to the end of their rise is the bond sell off sort of into its final faces is a little bit long in the tooth. When we look around other indications, whether to be monetary, financial or mro, a lot of stuff pointing to the end of the cell v, we've got markets from japan, j gbs, collateral indications, macroeconomic data from the I S M, which was pretty ugly.

The payer report, which many people want to set aside, is is influences too much by hurricanes and strikes and other one of factors, but more and more appears, especially with the revisions. And as far as the labor market is concerned, the one off with september strength, not the weakens that been coming since earlier in the year. So we put all of these things together, including other indications in the short run, such as terms so far for the first part of the bonds are off.

The idea that the fed is regretting its rate cuts and made actually pausing them in either in november, december that's increasingly being thrown out. The windows that I term sofa never really ball into the fed regret to begin with, sofa rates continue to move. Lower pricing, a solid chance of continued rate cuts from the fed is a reason why that's going to be the case, which is everything was seeing the macroeconomic that apart from short run fluctuations and the markets all over the world, so look at illustrates that are rising in the headline in the middle of september, and they made a pretty substantial move, but they aren't out of the historical norm.

And as always, the fundamental picture, which is what really matters, that hasn't really changed. So while the degree affect uncertainty and therefore the future path of short term raise maybe got a little bit clouded in the mainstream sense of IT in markets as well as macro, nothing much as change in that regard. And if that's the case, and we would expect at some point this short run fluctuation, the rise and interest strates is going to turn around and head back in the other direction.

So Steve, mr, please bring you in here. What is your sense of where the bond market sell off is? And do you buy into this premise, first of all, that the federal reserve was ever even thinking about pausing its rate cuts or are going on a slower schedule, then maybe people are thinking about just a little bit just a little while ago.

jeff. There's no chance of that was going to stop cutting rates. I mean, we've heard from power before. He feels like he's behind the curve he wanted to cut before.

We're not seeing the revisions in the first pay report there, the validate that they do need to cut rate. Now we can argue they are not going to do anything other than look like defend is doing something that's really all that matters here. But when you look at the macroeconomy, IT is interesting that you see interest strato rising here because Normally when you see manufacturing data decline, you see payroll grow slope. That means that interest rates should be going down, not up, which is kind of interesting because what we're seen forced from the market is this pricing in of a complete republican sweep you've talking in the White house congress in that's going to lead to what we now know as bystry ks short bows because interest rates can only go up. But what I think is more than us in jeff, is that while traders and investors are taking that decision, the forces in the macro m economy are going to lead to lower intestines no matter matter whose present, who's in congress or what the f does you talking .

about this so called trump trade? Great, Steve, that's the idea that the new trump administration will come in and be completely different than the old bike administration. And is a lot of markets do a lot of the time in these types of periods where things are going in the wrong direction.

The idea is something different, just give me something different and I can hang my head and that will go out as a direction. So many sense, a lot of senses the trump trade is simply just is different. It's it's not the same as where where we are.

And therefore, because where we are is not heading in the right direction, there's a possibility we can argue and the market will argue about how bigger possibility that is that something different will actually lead to something good when we know that the macro economy doesn't work in that way. It's it's like that, you know some big ocean going ship IT doesn't turn around overnight. And when IT gets too far in the wrong direction, it's not so easy to bring you back and rescue IT with promises to do certain things.

But that's what why would that? I mean, I think the real point here is why illustrate a rising why the trump trade would might be behind part of that. To begin with this just the situation had gotten to be so ugly during the summer time.

There was gonna some kind of a backlash and retracement to begin with, as you said, the the payer reports that came out as we validated all of the stuff that went into the market interest strates going down as far as they did into the summer time. The payer reports were absolutely a mess when you get to the revisions. And that's only that's only the first.

I mean, there's everything else. Besides, as we've been saying all along, you expected that the data would continue to migrate from stuff that looks solid and resilient and soft landing. And over time, IT looks less and less that way.

And more and more the entire list and catalog of economic reports go into the recession side. Is so the establishment survey moving in that direction as well, moving solidly in that direction as well. This is it's searching for a an answer for why interest strates would be rising when the economic fundamentals and talk about some money fundamentals too, do not argue for higher interest strates. And there is definitely certain part of the market that looks like and just give me something different here. We need to get out of the situation before it's delay.

Yeah just because you go back to when trump had his first term in office, maybe you'll have a cyclone. We don't know yet. I'll find out, of course, by our show.

Next we is that what happens? Stocks were up, bonds went down. So course, if that your will happen before, that's how you're gona trade IT.

But kind like you mention, you know the ship of the global economy or the U. S. Economy is in a certain direction. Just because you find a new capital of the ship doesn't mean to turn around immediately. IT still takes a very, very long time here.

But I think when the chAllenges i'm seen, jeff, is we get these very large revisions going backwards, and we're going to see revisions from this report as well because the response rate was someone like forty seven point four percent. So the idea that there's any in there is report at all to begin with from the fact that reports are inaccurate due to the data collecting method. This entire report is largely made up based on half of the Normal sample ly.

So as we get more responses from the prior to reports, my bet is they're going to be further downland revised. That's we're going to hear from fedsure pal on thursday next week. Is him being concerned about the labor mark he said, had been concerned about inflation and that we're going to have to get a couple more cuts on the books, whether there is a twenty five or fifty, probably a twenty five, and then another twenty five and december before the reality of where this economy is going. Finally, you have makes IT home to the central bankers who will cut rates like crazy.

What is interesting isn't that that despite the inaccuracy and noise of the payer reports, they only seem to go one direction, which is really about the struggle that the the being countering and statisticians that to be A S are having. Even with, even with higher response rate, they still bias the dad or higher, which is what we continue to see.

In fact, if you look at the initial reports for twenty twenty four to nine months up until september, they said that job gains were about two point one nine million, which not all that great, but two point one nine million was the initial report. What they actually show now after just the short run revisions, is just around lobert lesson. One point seven million old, twenty percent of the jobs that they thought we're gain from the initial report have just completely disappeared.

And what that says is that, you know the B L, S. Has a certain view of the economy being much Better than IT actually is. And when you apply that in that factor to all of the debt that kept over the summer time as you're just same, Steve IT means that the situation is likely a lot worse than that already appears and IT already appears to be heading in the wrong direction.

And that's really what the market has been saying. So you go back to twenty sixteen when trump in the election, the first time you right bond sold off in twenty sixteen pretty sharply. But that wasn't necessarily because of trump as as much as IT was the fact that the economy across the rest of the world in twenty fifteen and sixteen has been in a downturn and IT was moving into an upturn phase.

Where is in twenty twenty four? The global economy in the U. S. Economy too, are still in the initial stages, even though spent a long preter time of moving downward. So the election kind of falls later in this, earlier in the cycle than I had the last time around, which is another factor against the idea of this being anything more in the market then the short run rise and fluctuation and interest rates. Yeah, absolutely.

Because we did see a pretty substantial drops in two years. Yellow, of course, that would make sense. There were people that would come and want to sell boys because they feel it's attracted a place to do.

That, nevertheless, is a trend of the economy, as you mention. You know what? Trump took off as the first time.

He was the beginning phases of an expansion. Now we could argue the matter who gets elected on tuesday. We're in the beginning phases of the downturn.

And so the policy reaction from the market right now, in the short run, maybe bytes ck cell bonds to, hey, this happened twenty sixteen. We're going to see you again, but that trades not going to let. And we may see a shock over the next week or two after election, depending on, of course, who wins.

If we see trump retake the office, we may see people come in and dump h bonds. But it's not gonna. It's not gonna hold because we know the trend of the economy is we key and that interest strates follow, of course, growth and inflation expectations. Weakening economy certainly not can be growth or inflationary. We already know that.

Yeah that last time we also had the short rung path of the future path of short termini strates, you know fed rate hikes twenty sixteen and to twenty seventeen and to twenty eighteen. So shorter magistrates were rising at that particular moment in time, reflecting, as you just said, the reflections ary conditions of hi, where is now we've got short ter magistrates going down. It's interesting.

We look at term sofa and I mean term sofa, not term sofa futures, even though term solve s derive from term sulfur futures, but basically the short term interest strates, or at least what the market assesses is what shorter magistrates term would be. You look at one month term so far, that one has never Priced anything other than a first of all, the fifty basis point cut september and then another twenty five coming along in november. Never waive red on that at all even after the september pair report came out last month and then three months terms so far.

Well, that went backed up after the september payer report last month. It's been moving lower again throughout october, which is the twenty five basis point cut, at least what's what the market is expecting in december. So as far as the short term of the money curve as suggesting the fed was never going to shift from its fifty, twenty, twenty five, twenty five, twenty five plan.

And that was despite all you know GDP that came in last week. It's looking really strong and resilient. The payroll report is inside less september in the butcher. Other data look less, less, less negative than what we were seeing heading into the to the rake cut. So the markets are still saying everything is on track for lower interest strates at the short end and the macro economy appears to be on track for or continued negative fundamentals at some point. You put those two things together with the whole bunch of stuff that's going on a colleran in long and industry tes, we're gonna to turn around at some point unless there actually is some kind of meaningful change as the elections are never actually that meaningful change.

right? Just so this is clear action by traders and investors and borrowing course or something that they know that we can see in the data, which that obviously is in the case because we as you said, we would see the reaction in short term rates. There would be some other indications.

Ces, hey, wait, amit, maybe things are turned around. And if that was the case, again, IT wouldn't matter. Who takes the White house in the next election? IT wouldn't matter at all. IT would be a more of a function of is there an actual soft landing or changing the economy where we can see the ship? Turney, in our case, when we look at the data, particularly when we see the manufacturing data, we see the economy getting worse, not Better. And yes, maybe boing will sell a strike in the next week or two, but that's not enough to change the trend of where this economy is going, of particularly what's going on the manufacturing sector.

Yeah, the eye member report came out on friday and that was pretty ugly. The headline number was forty six point five, which was down from forty seven point to the month before. This is for october.

That's the lowest july of twenty twenty three. The employment index, which is consistent with all the negative employment numbers, are we getting including the established ment survey? I was forty four point four while I was half a point Better than in september.

That makes four straight months with the employment inx of forty six or less, which is firmly into a recession territory. And you're favorite Steve, I know you love this backlogs. The backlogs index fell down to forty two point three, which means that even as businesses manufacturer are cutting back on production, they're cut in back on hours, they're cutting back on workers and they're still working through their backlogs.

Es anyway, which is a recipe for future weakness. So the manufacturing sector, which is a leading sector overall economy, is like shorter ministration, looking worse and worse and worse. We head in through into the rent and this year. And so all the elections don't change the fundamental picture. I mean, maybe the best example of that two thousand eight, we go back to two thousand eight.

And of course, we're not saying there's going there's a crisis in the same level of recession and contraction and to twenty twenty four thousand and two thousand eight, but there was that same type of impulse that, okay, black obama wins the president see very different tones intended from George bushes president scene. Everything else leading up to that, and the entire marketplace around the world was begging for something different because everything was going wrong. Obama represented a huge change from where bush was, and IT made absolutely no difference because you get to the first half of two thousand and nine was the worst half year in the labor market in the global economy since the great depression. So the election of even a drastically different administration change absolutely nothing.

Yeah just so you're write about, I love backlogs at work. I really do because if you ve got ours work and that's really important because a lot of people are going to focus on, hey, average I earnings to win up. Well, guess what? They tend to go up going in to every recession.

So that's not really any news to follow because that makes sense. If i've got three employees and I get rid of my worst one, well, I probably to give my two best ones a little bit of a race to stay on. But if I cut their hours, that's even more significant.

Now right now, what did we see? Hours worth were stable. But based on what we're seen in the I sm manufacturing sector with declines in new orders, employment backlogs, IT suggested some point we're going to see hours work drop in when that happens. In my view, that's game over because that's kind of like the last draw to hit before the labor market comes to unwinding.

And it's around the I means a little bit here and there, right? We've been talking about this all year. It's the lack of hiring have been we've been featured that and focusing on that since last year, businesses stopped hiring people, and that has shown up in all of the that including now the establishment survey.

They don't want to hire because they realize the macroeconomy is not worth you know, their investment in new employee. So that's it's already been established. And then you see various different data sources, not just to pay or reports.

Jokes is another one that suggests that businesses are taking even bigger steps toward managing their cost. The household survey for employment there, even though they don't attract individual hours, we see conversion from full time to part time, which is another big indication that nobody's hiring businesses are tremere workers. And now we get now we get some slight indications that maybe there are starting to let goes, not just the I S.

Manufacturing index, but also you know the stablished survey was close to zero and not top, and August IT was close to zero in october as well. And he make some adjustments for revisions. And there's a there's a there's a reasonable possibility the payroll were negative in August as well as october.

That's two months. Not doesn't mean hurricanes or strikes as two macroeconomic months where maybe we are getting an increase in potential layoff. S and that was, by the way, that was something that also came up in gel ts for september.

Laos moved up pretty substantially there. Well, even though they're still low historically, it's the trend. And really that's everything we're talking about here. It's the trend.

Everything anything related to the macroeconomy in the labor market is moving in the wrong direction to the point that it's it's not just a little bit of a little bit concerning. It's something that maybe the fed will take you to under advisement. And its next meeting is, as you said, they wanted to cut in july.

We know they wanted to cut in july. They did the fifty in september. And you're got to believe, given everything that's happened, including the september pay or report, the fed is looking at everything and saying we need to keep going.

If not, you get going faster. You put all these things together. Fundamentally um industries have to reflect what the fundamental economy is regardless of any short run fluctuation. So even there's optimism about politics and everything else. Still we're still in that same summer time downswing that, that continues to move and continues to get worse.

yes.