Morning Seeds • 12/06/2023 - 9:15 AM EST
Jobs
(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.
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Small Caps
Megacaps Quietly Return to Leadership
Yesterday was a quiet day for stocks following Monday’s pullback. The SPX closed down slightly for the day, while the Nasdaq composite finished higher. Smallcaps were down sharply after the recent strength seen with the bounce in the size factor, a departure from the sharp reversal of prior days. Job openings data came in ahead of Friday’s payroll release, and the ISM services release was in line with expectations as the service sector remains okay while manufacturing remains weak. It was another strong day for Bitcoin.
Election
Elections into Focus
2024 will, globally, feature an unprecedented concentration of impactful elections with none more important than the US in November. While investors are constantly reminded of this pendency, with - for example - tonight’s Republican primary debate, arguably markets have not significantly priced in future volatility and other potential for radical political change. Last night, President Biden may have marginally elevated this consideration in commenting at a Massachusetts fundraiser yesterday that “If Trump wasn’t running, I’m not sure I’d be running.”. In our view, changing probabilities around electoral outcomes (although probably not Presidential candidacies) are likely to come squarely into focus with the turn of the calendar - this represents what we might call a certain uncertainty for 2024.
