Bond markets, which have spent the last half-year coming back down to reality as they face the fact that the Federal Reserve’s war on inflation is backsliding, jumped on the milquetoast jobs report released by the Bureau of Labor Statistics on Friday. Although the April jobs report was a mostly fine mixed bag — the unemployment rate was mostly unchanged near a half-century low of less than 4%, even as the 175,000 jobs added proved lower than economist expectations — Treasurys futures pounced, pricing in dramatically increased odds that the Fed will actually slash interest rates before Election Day.
Call it a swan song of the post-COVID delusions of the professional investor class, which has, time and time again, been disproven and deprived of its dreams of the perennially postponed “Fed pivot.” Just as bond markets continued to predict prematurely that the Fed would pivot to a pause all throughout 2022 and 2023, Treasury futures started the year pricing in projections of six or seven rate cuts throughout the year, more than twice the three rate cuts telegraphed by the Federal Open Market Committee’s Summary of Economic Projections.
Then the data came in, putting the dream to death. Headline personal consumption expenditures inflation, headline consumer price inflation, headline wholesale inflation, and core wholesale inflation have now increased for two straight months. Of the Fed’s primary inflation measures, only core PCE and core CPI have stagnated, the latter at nearly twice the Fed’s maximum inflation target of 2%. And on a three-month annualized basis, a more precise picture than the annual measure, the Fed’s preferred inflation measure of core PCE skyrocketed from 3.7% in February to 4.4% in March, more than twice the Fed’s 2% maximum inflation target.
By the end of April, bond markets priced in a more-likely-than-not chance that the Fed would not cut rates before Election Day and a 1-in-4 chance the Fed would not cut rates in 2024 at all.
But the free money delusion, like any addiction, is hard to kick. Despite Fed Chairman Jerome Powell’s Wednesday press conference promising that rate cuts would take “longer than previously expected” given the “lack of further progress” on inflation, investors interpreted the April jobs report as though the unemployment rate hasn’t spent an unprecedented two years below 4%.
Treasurys futures, which were nearly unanimous in their predictions that the Fed would not cut rates at its June meeting, have upgraded the odds of at least one rate cut by June to 15% and by July to 31%. Bond markets have also priced in an 18% chance of at least two rate cuts by Election Day and a 60% chance of at least two by the year’s end — a dramatic transformation from earlier this week when Treasurys reflected a two-thirds chance of no more than one rate cut in all of 2024.
Given the raw data of April’s jobs gains, this adjustment is little more than wishful thinking. Unlike dismaying data from previous months, when government job growth contributed a plurality of the jobs added, artificially boosting the appearance of a naturally robust labor force, government jobs comprised fewer than 5% of the jobs added to the economy in April. The crisis that monetarists and budget hawks have spent four years lamenting, the share of able-bodied adults prematurely retiring from the workforce entirely and expediting the insolvency of our welfare state, continues to persist, but it’s not as though it has actually worsened in any significant way to warrant the bond markets backsliding toward their rate cut hopes.
The fact remains that even if the labor market has cooled slightly from its way-too-hot-to-handle highs, both job growth and economic growth remain far too robust to possibly justify cutting interest rates as the Fed’s war on inflation hasn’t just stalled but has actually lost ground as most of the Fed’s primary inflation gauges indicate that price instability is roaring back in a redux of the ’70s.