Weakest private payrolls since January, and the hike probability did not care
⚓ Weathervane – The wind is coming from the long end. The policy rate has been frozen at 3.50% to 3.75% since July whilst the term premium does the tightening, and the price of long money is now set by deficits, issuance supply and a synchronised global duration bid rather than by the committee. Higher-for-longer has stopped being a Fed decision and become a bond-market fact. The cruise ship is holding this heading.
Tuesday challenged it and Wednesday did not follow through. Tuesday’s front end moved twice the long end. Wednesday moved everything two basis points in parallel. One session against
Ahoy there, Trader! ⚓️
It’s Phil…
Here is a contradiction I cannot resolve today, and I want to be careful about how I fail to resolve it.
The central question. Is the market pricing a hike because of the oil, or in spite of the jobs?
Walking the dots
Wednesday gave us two labour reads and they agreed with each other. ADP private payrolls added 38,000 in August, against a 47,000 consensus, the weakest since January. Strip out the 45,000 from education and health and the rest of the private economy went backwards. Manufacturing shed 17,000. Professional and business services shed 16,000. Then the Beige Book arrived and described employment as rising very slightly overall, with activity expanding modestly.
The bond market agreed too. Two-year down two basis points to 4.38%. Ten-year down two to 4.79%, having touched 4.818% intraday first. Thirty-year down two to 5.26%. Equities took the relief and snapped a three-day slide.
And the probability of a 25 basis point increase this month sits near two thirds, against roughly 40% a week ago.
That last number is the one that does not fit, and the obvious reading is that employment has stopped mattering. Warsh said at Jackson Hole that inflation remains too high. Crude went through 90 dollars. Barr said he would support an increase if inflation does not ease. On that account the labour market has been temporarily disenfranchised and only an energy or inflation print can move the path now.
Textbook versus reality
Here is where I want to slow down, because the tidy reading has a hole in it and I nearly walked past it.
A single-meeting probability and a two-year yield are not the same instrument. The probability prices one decision on one date. The two-year prices the whole path across twenty-four months. Those two can move in opposite directions perfectly coherently: the market can raise the odds that the committee moves in September whilst simultaneously lowering where it thinks rates end up, and a weak jobs print does precisely that. A hike that arrives sooner and stops earlier is a lower path.
If that is what happened, then nothing was disenfranchised, the labour market was heard exactly as the textbook says, and the contradiction I have spent this letter describing is an artefact of comparing two different measurements.
I cannot separate the two readings with what I have. What I would need is the intraday path of the September probability across Wednesday itself, to see whether it rose on the day or simply carried a week-old level dominated by Warsh and the oil shock. I do not have that, and I am not going to assert a conclusion that rests on the number I am missing. That mistake is in our own ledger from Tuesday, where four sessions of an absent signal got written up as evidence for the opposite thesis, and it was wrong within a day.
Phil’s Musing
My lean is that both things are true and the second one is bigger. The path probably did come down, and the September odds probably did stay high on the barrel, and the market is genuinely saying sooner but less rather than simply more. What makes Friday interesting is that a soft payrolls number now has to do two jobs at once. It has to beat the oil price and it has to beat the Chair. If it comes in weak and those odds stay above half, then the disenfranchisement read is real and I will say so. If they collapse, then the labour market was never voted out and I read too much into one afternoon.
Happy trading,
Phil
Less Brain, More Gain
…and may your trades be smoother than a cashmere codpiece
P.S. – Phils Footnote The habit I am trying to build, and I am not there yet, is noticing when two numbers that look like they disagree are actually measuring different things. It is the most common way I have fooled myself over the years and it never announces itself. Wednesday looked like a paradox for about an hour, and then I remembered that a probability of one meeting and a yield on a two-year note are answering different questions, and the paradox got a great deal smaller without entirely disappearing. Friday at half past one, London time, we find out how much of it was real.
