It was the opening scene of “Saturday Night Fever” where John Travolta’s walking down the street holding a paint, strutting with emboldened confidence and poise. Instead of paint cans, LOs held rate sheets rolled up like newspapers with a front-page headline that read “Jobs Barely Staying Ah-Ah-Ah Alive”, with the Bee Gees anthem playing in the background. With each finger point across the office at the random guy standing over the water cooler, or a head nod at the receptionist wondering what had got into Carl that morning, the situation became evident… Mortgage rates have IMPROVED!
Now, before we go off starting any disco battles, let’s first discuss the data itself and what’s on the horizon to shape our trajectory… This past Friday’s jobs number spoke for itself. Jobs down, unemployment up. Also to note, June’s payrolls went negative -13k, the first time since June of 2020. The result was the equivalent of the “Travolta Point” for treasury prices.
The focus now shifts to is this week’s inflationary side. First on the docket is PPI (Producer Price Index) hitting this Wednesday. Last month, we saw a spike in both the food and services sector, offering insight into inflationary pressure driving up pricing. On Thursday, we get CPI, which was also hotter than expected last month, especially in discretionary services (hotels & airfare) and auto, which some consider the start of pass-through from tariffs. Will there be carryover this month? These considerations are what is likely going to keep the 10yr above 4.0% for the time being, at least until the market receives the data in hand to determine its next move (the Boogie Down, the Step Up, or the Sideways Shuffle?).
A final thought for the day comes from a constructive thesis on how we could see continued improvements in rates. Barring we don’t get anything shockingly high from the inflation fundamentals this week, it’s hard to imagine the Fed diverting from at least 25bps in cuts this month. That said, where the narrative could shift is in the implications of a weakening labor force being the main driver of demand destruction. Less jobs = less spending, and that in turn could help cool inflation. Therein lies a case for the continuation of further Fed cuts and in turn, lower rates.
While the Bee Gees were singing about survival, today’s market is hinting at revival… and if the data busts the right move, we’ll be doing much more than staying alive … we’ll be shaking our groove thing.