What game are the markets playing? Especially after the publication of the US October employment report. Overall, it looks like there is some chaos...
Why chaos now? We have a culmination of many outsize risks, be it the elections, the Fed meeting, extremely weak data from the labor market (hurricanes, strikes, negative revisions) vs. the narrative of a strong US economy and the return of inflation. In addition, we had a sharp decline in stock markets on the last day of October..
As for the labor market, the next report for November may be key... (published on December 6), then we will see whether the weak data for October will be confirmed... the labor market is clearly weakening, but the data is also very volatile from month to month – as it was similar at the end of the cycle in 2019 - see Figure 1.
Weaker labor market data affected the GDP forecast for Q4.. The Atlanta GDP tracker already indicates only +2.3% (GDP) and +2.6% consumer spending (PCE) in Q4 - see Figure 2 and 3.
The increase in 10Y yields to 4.39% is intriguing! With a weak labor market and falling oil prices – such a combination is rarely seen.. (see Figure 4). Interestingly, the reaction to an increase in employment of only 12k (+10 bps on the day of publication, full-day change) was similar to a month ago to an increase of 254k... (+12 bps on the day of publication - October 4) – see Figure 5.
If the increase in yields is a continuation of the "Trump trade" effect... then it is not consistent with, for example, the simultaneous decline of DJT.US (Trump Media & Technology) by 13% on Friday and a total of 41% for the last three days... Figure 6.
All in all, the market will (hopefully) get more clarity after the elections and the FOMC meeting next week. In the case of the labor market, one can only hope for more clarity after the publication of further data... culminating in the next most important report on December 6 (employment situation for November).
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