| Interest Rate Market Snapshot | ||||||
| Federal Funds | SOFR | 2Y Treasury | 5Y Treasury | 7Y Treasury | 10Y Treasury | |
| 5.33% | 5.31% | 4.91% | 4.62% | 4.62% | 4.61% | |
Huge week for the rates market, with a notable breakout from the 10-Year
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We saw big swings in the rate market this week, with market moving reports and Fed speakers throughout. But volatility truly came to a crescendo this morning following the March jobs report
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And these labor market reports just keep surprising to the upside. Remarkable to say the least
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303,000 jobs added to the economy last month – well above the 214k estimate and February’s 270k
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For some perspective: during the decade between 2008-2018, monthly job creations over 300k were seen just 10 times. Yet since 2021, we’ve eclipsed that level 20 times
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The unemployment rate drops to 3.8% from 3.9% (now two years of sub 4% unemployment)
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Wages rose 0.3% in March and 4.1% over the past 12 months, in-line with estimates, while February was revised higher to 0.2%
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Lastly, the participation rate rose to 62.7% from February’s 62.5%
Source: Bloomberg
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The job gains were broad, but the categories that added the most last month were Healthcare (+82k), Government (+71k), Leisure and Hospitality (+49k) and Construction (+39k). Meanwhile, Manufacturing jobs came in flat for the prior month with February revised 6k lower to a 10k loss in jobs (figures contrary to the ISM Manufacturing readings earlier this week that showed the industry expanding for the first time in years)
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Average hourly earnings for all employees on private payrolls increased 12 cents to $34.69 (curious to see how California’s minimum wage increase to $20/hour for ~500,000 fast food workers will impact this number next month)
source: Bloomberg
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Yesterday, Powell’s remarks at Stanford University were largely a rehash of the same things stated at the March FOMC meeting: The Fed is very much data-dependent…rate cuts will happen when there is enough confidence inflation is well under control…still on track for three cuts this year but will quickly react to a weakening labor market
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But it raises the question: why commit to rate cuts at all? This morning’s report confirms just how strong the labor market is. Their dual mandate is faced with: 1) CPI stuck at 3.0% - 3.5% and 2) an expanding labor market, not a weakening one
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The point of cutting interest rates is to provide support to the economy – but it seems like it’s doing just fine with 5.30% Fed Funds. Why dilute their dry power with cuts this summer if inflation improvements are slowing and the labor market doesn’t warrant a pivot?
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At least Minneapolis Fed President, Neel Kashkari, is thinking about those rhetorical questions - commenting yesterday: "I wrote down two cuts in March, but possible the Fed won't cut this year if inflation stalls”
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The market seems to be coming around to that very same question too – with the forward curve now repricing what a cutting cycle may look like
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Less than 3 cuts by year end – more hawkish than the Fed’s own forecast
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The first one by July (maybe June) – unchanged
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But the new development being where the market expects the Fed to stop cutting – now much higher and sooner than previously thought
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source: bloomberg
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The repricing of the curve is lifting rates – but notably on the long end
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2-Year rates are struggling to breakout of their range, but 5,7 & 10-Year rates are breaking out to the upside
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Source: bloomberg
The move higher in frontend rates looks almost exhausted given the pace of cuts now priced in, but the belly and long end could have more room to run
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The forward curve has repriced the pace of near-term rate cuts at almost the same extent as we saw during the most hawkish curve of the cycle (back when Treasuries across the curve hit +5%)
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And because of this, 1 & 2-year rates may find it difficult to breakout above 4.75% and continue to trade range bound
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Yet further out, upside risks remain as the market tries to understand what it would mean if the Fed only cut rates a few times before stopping
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If the labor market doesn’t force emergency cuts, and inflation just meanders down to 2-2.5%, a cutting cycle may end up being short and sweet – a tailwind to support higher yields on the long end of the curve and very plausible we see the 10-year Treasury looking at 4.50% again
source: bloomberg
Covered calls
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If the last two Fed meetings has taught us anything, it’s that despite marginal increases to inflation and/or strong labor markets, returning to rate hikes is off the table
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Instead, we could be looking at a Fed that may elect to hold longer in response to inflationary data
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So, selling a covered call is shaping up to look like a nice way to take advantage of this jump in rates
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Consider striking it somewhere above current 5.31% SOFR as to not impact monthly settlements
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Directionally, the cap’s Dv01 offsets the swap to some degree, but leaves room for it’s MTM to continue benefiting should futures rise from here
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Collect the option premium upfront – amounts now worth looking at given the repricing of the curve and volatility baked in
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This week's Play-by-play
source: bloomberg/stonex
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