(Over)Enthusiasm for Softness
Over the past month, a trend has emerged in the rates market. Weak or disputed data is quickly acknowledged and influences market behavior. In contrast, strong data points initially generate interest but lack sustained follow-through. For instance, the recent Job Openings and Labor Turnover Survey (JOLTS) showed underlying strength despite a headline decline. The market fixated on the headline, overshadowing the positive details. Market behavior seems almost frenzied, but expectations are already priced in significantly: 125 basis points of rate reduction over the next year, with a 70% chance by March and an additional 50 basis points by June. This raises questions about the Fed's commitment to its "higher for longer" stance. The issue is, however, that the market is well ahead of this projection. This global phenomenon extends to Canada and the ECB, both of which have similar market expectations but aren't expected to change policy immediately. After a two-month rally in yields followed by a swift reversal in just over a month, the key question is whether further declines are possible. The loss of jobs has historically been a significant turning point, but current forecasts indicate a stronger employment outlook than the previous month. It remains to be seen if the market will reassess its recent rally based on these historical patterns.