Bond Yields Continue Marching Higher

Week Ending 6 October, 2023

The start to Q4 is carrying on from where Q3 ended. We’re seeing heightened volatility as bond yields continue their march higher. So far this year, this has been driven by the notion of rates remaining higher for longer. Today, markets have been rocked by stellar job numbers in the US (the September US Non-farm Payrolls). For context, here are some highlights:

1. Job creation soared +336,000 (vs an estimate for +170,000) – and this despite higher rates, the labour strife (UAW) and the resurging chaos in Washington.
2. The unemployment rate (a different measure to the Non-Farm Payrolls) rose to 3.8% (from 3.7%). That’s because more people rejoined the workforce.
3. Wages increased more softly at +0.2% m/m to 4.2% y/y (the forecast had been for +0.3% m/m and 4.3% y/y respectively). The pace of wage rises is down from close to +6% y/y in Jan. 2022 to 4.2% y/y now.
4. Leisure & Hospitality gained +96,000, Government +73,000, Healthcare +41,000, Professional, Scientific & Technical +29,000, Motion Pictures -5,000 and Sound Recordings -45,000 (labour dispute in Hollywood re scriptwriters). Service-related industries contributed +234,000 of the total last month, Goods-producing +29,000. The Private Sector gain was +263,000 – way ahead of the ADP number on Wednesday.
5. There were substantial, upward revisions to August (+40,000) and July (+79,000).
6. The labour force participation rate held at 62.8% (just 0.5% below the pre-pandemic level). For those in the 25y to 54y age group, it was unchanged at 83.5%. A wider measure that also includes discouraged workers and those holding part-time positions, for economic reasons, edged down to 7%.

No surprise that bond yields are up significantly on the back of this print. The 10y has risen +0.07% to 4.79% while the 30y has risen 0.05% to 4.94%. What was a sharply inverted yield curve previously has flattened considerably over a longer duration period reaching into the belly of the curve. This has boosted the odds of a rate hike, before year-end, to 44% (CME tracker).

Something else to take note of is the Global Activity Monitor (as measured by PMI data). In the world of DM (Developed Markets), there are signs it has started to turn. Having declined for most of 2023, DM activity is displaying signs that it has reached the trough as new orders start to rise (see chart below).

For manufacturing as a whole, PMI (=activity) rose by +1.7% in the US while remaining roughly flat in Europe and China. Any reading below 50 implies contraction. So, while markets freak out about how the US and Europe remain in contraction zone, they’re not taking note of the change in direction coupled with what looks like a change in new orders for the better. China remains in expansion mode even if only by a slim margin. Considering what has been going on in China, that’s quite a result. Service activity indicators have been on a declining trend in the US and China but still remain in expansionary (i.e. greater than 50) territory. Interestingly, in Europe where services have been in contraction, it saw a pickup of +0.7%.

Last week I referenced several reasons why rates could remain elevated – even go higher. Today’s employment print combined with the latest trends in manufacturing activity reinforce that view! My portfolio suggestions, also from last week’s commentary, remain valid. As yields rise, there is a real opportunity to steadily go longer duration.

MARKET UPDATE