December 06, 2023
In advance of the government's November jobs report due out Friday, we look at the private-sector equivalent that hints the labor market is entering a new phase.
- But first, we tease apart why that huge surge in long-term interest rates we covered extensively in September and October has almost completely flipped.
Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 654 words, a 2½-minute read.
1 big thing: Long-term rates' rapid reversal
Market sentiment has shifted abruptly in the last seven weeks as fears have eased that the U.S. is getting locked into an era of much higher borrowing costs.
- That means a bit of relief — relative to October, at least — for homebuyers, corporate borrowers and the government's fiscal position.
By the numbers: The round trip in long-term bond yields is remarkable. The yield on 10-year U.S. Treasury notes rose from 3.85% in late July to a hair under 5% on Oct. 19.
- Since that day, the yield has fallen back to 4.12% (as of 10:50am ET today).
- That is being passed through to other borrowing rates. Most notably for would-be homebuyers, Mortgage News Daily's measure of the average 30-year fixed-rate home loans also peaked Oct. 19, at 8.03%, and was down to 7.08% yesterday.
State of play: In the staid market for Treasuries, those are the kinds of wild swings usually only seen in moments of extreme crisis or major policy pivots. Economic data, fiscal policymaking and Fed communications have shown only subtle evolution in that time.
- The move is partly driven by investors' falling expectations for future inflation — surely prompted by a series of comforting pieces of inflation data in recent weeks.
Yes, but: It's not just diminishing inflation expectations driving the shift. The 10-year real interest rate is down about 0.4 percentage points in the same span.
- That suggests the smart money is backing away from the thesis — much discussed in September and October — that U.S. interest rates will need to remain high indefinitely as a result of high fiscal deficits and falling global demand for Treasuries.
Between the lines: The reversal in long-term borrowing costs reduces the risk to interest-sensitive sectors of the U.S. economy in 2024 — housing, regional banks and commercial real estate among them. But it is a signal that the robust growth of this past summer could be a thing of the past.
The bottom line: The rapid decline in yields, writes Quincy Krosby, chief global strategist for LPL Research, in a note, "is concerning as it reflects a slowing economic backdrop, but perhaps one that is deteriorating at a faster than desired clip."
2. "End of an era"
The U.S. labor market has entered a new phase, according to payroll processor ADP. Two huge trends that defined the recovery — rapid job growth and massive pay gains for job-switchers — are over.
Why it matters: The firm's latest employment report shows moderating private sector job growth and slowing pay gains — the latest indication that the jobs market is transitioning to something more reminiscent of pre-pandemic times.
Details: The leisure and hospitality sector — think hotels, restaurants and bars — was the poster child of the labor market recovery. That's no longer the case in ADP's data. The sector shed 7,000 workers, the first contraction in two years.
What they're saying: "This report marks the end of an era when it comes to the labor market recovery," ADP chief economist Nela Richardson told reporters.
- "What we saw over the two-year recovery — the rehiring of the low-paid workforce that was tied to leisure and hospitality — is no longer dominant."
The report also shows that job-switcher pay gains are falling closer to that of job-stayers — a sign that the "Great Resignation" boom, when workers left old jobs in search of higher pay, is waning.
- In November, job-stayers saw a 5.6% increase from the prior year, while job-switchers saw pay gains of 8.3%. Both groups are seeing the slowest pace of wage gains since September 2021.
The big picture: The private sector added 103,000 jobs in November — a slightly slower pace of hiring from the 106,000 added in October.
The bottom line: "We have to remember what solid monthly jobs growth looks like in the U.S. economy," Richardson said.
- "It's been three years of something very extraordinary. Now we're getting to something more modest."