Jason's World

In recent weeks, in the wake of the Fed’s hawkish pause, market interest rates have soared, as evidenced by the sharp increase in the 10-year rate to 16-year highs. This was aided by an unexpected resolution on government funding in the US Congress (though former Speaker Kevin McCarthy had to give up his job to pass it, highlighting great instabilities in the US political system) and a better than expected ISM (49.0 vs. 47.7 estimate). 

Typically, positive surprises in the economy have boosted bets for Fed hawkishness, pushing up interest rate projections. Meanwhile, there are risks that could push up rates even further. The ousting of Mr. McCarthy as speaker highlights the growing instability of the Republican majority in the House due to a small fraction of rebellious representatives having influence over its narrow majority. As the government once again faces a shutdown in five weeks, who the GOP elects as its next speaker will have big implications for whether the Congress will be able to pass a bill averting a shutdown.

Friday’s job report shows continuing strength in the job market, though wage growth was lower than expected. This put further upward pressure on interest rates, sending markets tumbling again this morning. As of now, the 10-year yield rate has risen 0.2% in the span of a single week, continuing a months-long sharp increase in yields since March.

But markets quickly recovered as yield rates retreated slightly, a sharp reversal from the past year or so where markets tended to do poorly following strong jobs reports. Though yields remain at 16-year highs and today’s jobs report remains hawkish, it seems like a “return to normal” in the sense that good jobs reports are good news for the markets once again.

This is backed up by a belief that the Fed is unlikely to significantly raise interest rates again, even with a strong jobs report. This belief is reinforced by a belief on part of the Fed that rising bond yields will aid them in their efforts to stem inflation. As San Francisco Fed president Mary Daly put it, “(With long-term rates up), the need for us to take further action is diminished because financial markets are already moving in that direction and they’ve done the work. We don’t need to do it more.”

Since all fixed income securities trade at a spread compared to treasury yields, an increase in treasury yields will in turn put upward pressure on other bonds’ yields. This will accomplish the Fed’s goal of making it harder for businesses to borrow and lowering economic activity and inflation. 

Wage growth was also interpreted as a dovish point-month over month, it grew slower than expected, at 0.2%, and over the past 3 months, they grew by 3.4%, lower than the annual inflation rate of 3.7% in the previous inflation report. 

In other news, Tesla scored a major win on Friday as Hyundai, Kia and Genesis, three major South Korean automakers, have adopted the North American Charging Standard, which is based on Tesla’s charging interface. This will mean more revenue for Tesla charging stations as more electric vehicles hit the road in the years to come. Though Tesla’s shares were significantly hurt by its price cuts, it managed to narrowly turn positive by the end of the day Friday.