The Labor Market Flexin’

Talk regarding one of the Fed’s favorite historical leading indicators of an impending recession is garnering a lot of attention lately, as the 3 Month Treasury Yield surpasses that of the 10-Year. Historically, this has predicted a 100% chance of a looming recession.

This is good news for longer term interest rates, which tend to fall as markets embrace for a recessionary period. Given tomorrow’s rate hike will be the 5th large move by the Fed in 2022, we can expect this to add even more upward pressure to the short end of the yield curve which will further increase the spread of short vs long rates.

This will intensify the Fed’s conundrum of how hard to push future rate hikes to fight inflation as they counterbalance the cost of deepening threats to the labor market and the overall US economy.

The JOLTS report showing the number of new job openings came in stronger than anticipated, showing a continued resilient labor market that seems to be unfazed by the Federal Reserves rate hikes.

This report will increase the risk the Fed will continue their strong rhetoric about the need to raise rates. Without a plan to counter the bond market volatility that additional rate hikes could create, the Fed will risk a deeper housing recession by continuing down this path.

At some point, the Fed may be forced to provide stability to the bond markets. The volatility of the bond market and the rise of mortgage interest rates is not healthy or sustainable. By simply better managing the pace of their balance sheet roll off plan, they could help stabilize the markets. Hopefully, this is something they are now considering.

We will maintain a locking bias as volatility in the bond market remains high.