Yesterday’s recap headline spoke of bonds being on fire in a good way. Apparently word got out. Several party poopers arrived with buckets of water today.
The first of these buzzkills didn’t get much mainstream press but was arguably armed with just as many buckets as anyone. I’m referring to the overnight bounce in bond yields that ostensibly resulted from the generally overbought levels seen at yesterday’s close. To be fair, bonds have been overbought for quite a while, but with each new move into more deeply overbought territory, some sort of bounce became more and more of a risk. Asian and European traders arguably didn’t wait for the jobs report or the Fed to validate said bounce.
Even so, the jobs report and the Fed validated said bounce!
The case presented by the jobs report was obvious: nearly the highest payroll count in more than a decade, 3.9% unemployment that–while higher than expected–was offset by an equal increase in labor force participation, and the highest pace of wage growth of the entire economic expansion. The implication for bond selling was immediately clear. If bonds didn’t sell as much as it seemed like they should at first, it was due to the overnight weakness and perhaps to the 3rd market mover of the day.
The Fed was the final piece of today’s puzzle. They’d taken a harder line than markets were expecting back in December with the caveat that they’d be watching data very closely in case they were mistaken. The jobs report suggested they were far from mistaken (even though yesterday’s ISM made a different case–something that traders won’t be quick to forget). Logically then, stocks weren’t eager to rally on today’s jobs report because it essentially endorsed a hawkish Fed.
But today’s speech from Fed Chair Powell was apparently written before he saw the jobs numbers. It was remarkably conciliatory, even going so far as to say the Fed is sensitive to the messages being sent by markets. This is actually a very big deal because Powell is saying the Fed’s course of action might be affected if stock markets were to lose enough ground. Stocks immediately rallied on the Powell speech, with traders selling a few more bonds to finance the move. With that, 10yr yields were more than 10bps higher on the day and Fannie 4.0 MBS had fallen 3/8ths of a point. Tune in next week to find out if this is just the beginning of a bigger bounce in rates or merely the beginning of a sideways consolidation.