Last week, 2Y swaps plummeted by 54 bps to close the week at 3.69%. 10Y swaps fell by 40 bps to 3.36%. Both are fresh one-year lows. Markets softened on Tuesday with a JOLTS read of 8,184K, better than expected but softer than May (8,000 surv. | 8,230 prior). On the economic data front, the Job Openings and Labor Turnover Survey (JOLTS) exceeded expectations on Tuesday but was softer than the previous month, marking the lowest reading since the COVID-19 pandemic began. At Wednesday’s Fed meeting, Chair Powell indicated a likely rate cut unless future data changes, issuing a dovish statement. Thursday’s ISM Manufacturing index was relatively stable, but an increase in unemployment captured market attention. On Friday, nonfarm payrolls were expected to add 175,000 jobs but reported only 114,000. Despite this significant miss, the figure may be revised. The uptick in unemployment and the stock market crash in Japan today spooked markets globally, triggering a pan-selloff and a flight to US bonds.
This week, there is limited economic data expected, with the ISM Services data release scheduled for today and 3-, 10-, and 30-year Treasury auctions later in the week to watch closely. Currently, the market is pricing in 50 basis points cuts instead of 25 bps per meeting, with talks of emergency cuts, though emergency cuts are unlikely and could destabilize the market. While World Interest Rate Probability (WIRP) is useful, it may not accurately predict Fed actions, as it often reflects market positioning.
Friday saw the largest recorded volatility spike. Goldman Sachs increased the recession probability to 25% (from 10%), with the market seeing a 40% chance. The 2s/10s yield curve un-inverted this morning for the first time since July 2022 but has since returned to a slight inversion. Meanwhile, Congress is on recess until after Labor Day. Additionally, floating rate clients executing FWD starting rate caps continue to benefit from a notable difference between spot-starting and forward-starting trades. For borrowers evaluating new loans, the continued volatility and uncertainty may cause spreads to widen, which is particularly important for CMBS and Agency debt.
