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  • Writer's pictureKevin O'Reilly

Anticipation Builds: Market Focus on Federal Reserve's Year-End Meeting Next Week

Updated: Mar 5



TREASURY YIELDS REMAIN VOLATILE

The volatility in treasury yields continued this week, jumping on Friday following the November jobs report. The latest jobs print indicates an unexpected downward trend in the unemployment rate, suggesting continued tightness in the labor market despite the Federal Reserve’s efforts to cool the economy.


The yield curve remains inverted. The 10-year treasury yield currently sits at 4.233% up 10bps, while the rate on the 2-year treasury trended 14bps higher to 4.721%. The inversion has reduced significantly since mid-September, with the spread moving outward by 12bps since last Friday.



A RESILIENT LABOR MARKET

According to the Labor Department on Friday, the November U.S. jobs report showed continued resilience. U.S. nonfarm payrolls rose by 199,000 last month. This is marginally higher than the economic forecast of 190,000, as surveyed by Dow Jones, and better than the October gain of 150,000. Meanwhile, the unemployment rate fell to 3.7%, compared to a forecast of 3.9%.


Earlier this week, the private payrolls report by the ADP Research Institute indicated the addition of 103,000 jobs in November, falling below the estimated 128,000. Weekly initial jobless claims figures came in lower than expected.


DECLINE IN JOB GROWTH EXPECTED

Despite the “stronger for longer” performance of the labor market, the consensus among most forecasters is an anticipated decline in job growth in early 2024. This projection stems from expectations that consumers will deplete their savings. This will lead to reduced spending, and the remaining areas of labor shortage will be filled.



INFLATION SLOWS

Inflation insights obtained last week via the Bureau of Economic Analysis showed that the core PCE price index continued to cool. After increasing 3.7 percent in September, it advanced only 3.5 percent year-on-year in October, the smallest rise since April 2021. 


“SOFT LANDING” LIKELY

This week’s data further supports a “soft landing” prediction. The U.S. economy remains far from recessionary despite the fast-paced interest rate increases weighing on the capital markets, consumer spending and business investment. Martin Holdrich, senior economist with Woods & Poole Economics, said Friday, “That’s the definition of a soft landing: It’s the economy slowing slowly, which is what you want. “


The spotlight will be on the Federal Reserve's last meeting of the year which takes place next Tuesday and Wednesday. The prevailing expectation and consensus amongst forecasters and Wall Street is that the Fed will leave their target rate unchanged in the 5.25% - 5.50% range. 


Stay tuned.

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