Last week, the 2- and 10-year Treasury yields rose 13 and 17 BPS, respectively. Most of this movement came on Tuesday, which was the first trading day of 2024. More movement came on Thursday after a strong ADP Employment Report and a drop in jobless claims. Friday’s employment numbers showed that payrolls rose slightly more than anticipated in December (216,000 vs. 175,000 expected).
November payrolls were also revised down. Non-farm payroll numbers have now been revised down 10 of the last 12 months, averaging 165,000 over the last 3 months. This is the lowest 3-month average since July of 2020. These adjustments show that the employment picture doesn’t look that rosy after all.
We have a lot of inflation data to watch for this week with the Consumer Price Index (CPI) releasing on Thursday and the Producer Price Index (PPI) releasing on Friday. The market continues to decrease the number of projected rate cuts this year with expectations to return to the number projected in mid-December. However, with cuts still priced in, it remains a great environment to roll hedges forward. Volatility has been tamer in the swaps markets, making it a good time and good market to trade caps. We’ve seen great pricing from various dealers of late.
On a macro level, M2 contracted from the peak of 2022 by 4.5%. It has only contracted by more than 2% five times in history, and the last time M2 contracted this much was The Great Depression. It’s likely too early to say what this could mean, but it’s one of several signs pointing to a recession.
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