Trading Desk Talk

The final countdown

Domestic bond markets were listless last week. The 10-year Treasury closed on Friday about where it started on Monday, at a yield of 4.11%. The high/low range was only 4.16% to 4.05%. The lack of conviction is not terribly surprising, considering the many uncertainties around the government shutdown, the Supreme Court’s looming decision on tariffs, the state of the labor market, the strength of consumers heading into holiday season, the December rate cut (or not), and the upcoming refunding auctions.

It thus seems apropos for rock band Europe’s hit song “The Final Countdown” to carry the musical baton this week. However, we may need to make the title plural, given the scope of uncertainties heading into year end.

The shutdown means that government data is still lacking. Private data, though, gives us some insight on the labor market. U.S. companies announced layoffs totaling 153,074 in October—the highest figure for that month since 2003, according to outplacement firm Challenger, Gray & Christmas (Figure 1). The job cuts were driven by the tech sector, as artificial intelligence reshapes industries and cost-cutting accelerates. The Challenger report noted: “Some industries are correcting after the hiring boom of the pandemic, but this comes as AI adoption, softening consumer and corporate spending, and rising costs drive belt-tightening and hiring freezes. Those laid off now are finding it harder to quickly secure new roles, which could further loosen the labor market.”

Indeed, the numbers are weak no matter how they’re spliced. Year-to-date job cuts have exceeded 1 million, the most since the pandemic. In the same period, U.S.-based employers announced the fewest hiring plans since 2011. Seasonal hiring plans through October are also the lowest since Challenger started tracking them in 2012: “It’s possible with rate cuts and a strong showing in November, companies may make a late season push for employees, but at this point, we do not expect a strong seasonal hiring environment in 2025.”

The figures could also be viewed at odds with Federal Reserve Chair Jerome Powell’s recent comment that there’s only a “very gradual cooling” in the job market. To this point, the October print from payroll firm ADP offsets immediate concerns that the labor market is materially weaker than before the shutdown—or as bad as the Challenger report suggests. According to ADP, private-sector employment increased by 42,000 jobs in October and pay was up 4.5%, year over year. “Private employers added jobs in October for the first time since July, but hiring was modest relative to what we reported earlier this year,” said Nela Richardson, chief economist at ADP.

Unfortunately, the October gains were narrowly concentrated in education, health care, trade, transportation, and utilities. For the third straight month, employers shed jobs in professional services, information technology, and leisure and hospitality. Perhaps most importantly, wage growth hasn’t been too hot or cold to stoke inflationary pressures. “Pay growth has been largely flat for more than a year, indicating that shifts in supply and demand are balanced,” Richardson added.

While the risks to the Fed’s dual mandate seem to be entering more balanced territory, pricing pressures still carry marginally higher relevance in the eyes of policymakers. For example, Federal Reserve Bank of Cleveland President Beth Hammack said that monetary policy should continue putting downward pressure on inflation, which, in her view, presents a bigger risk than labor-market weakness. “I remain concerned about high inflation and believe policy should be leaning against it,” Hammack said last Thursday at the Economic Club of New York. 

She also estimated that inflation won’t reach the Fed’s 2% target until 2027 or 2028, a projection that is similar to the median estimate of the Fed’s 19 policymakers. That would mean the Fed will miss its price target for “the better part of a decade,” and risks embedding high inflation further into the economy, Hammack noted. “To me, comparing the size and persistence of our mandate misses and the risks, inflation is the more pressing concern. This argues for a mildly restrictive stance for our policy rate to ensure that inflation returns to 2% in a timely fashion.” Meanwhile, the current interest-rate setting is “barely restrictive,” she argued.

There were other notable remarks last week from voting members on the Federal Open Market Committee (FOMC):

• Austan Goolsbee (Chicago Fed President) said, “I have some concerns, and I lean more to the, ‘When it’s foggy, let’s just be a little careful and slow down.’”
• Michael Barr (Board of Governors) said, “We made a lot of progress on that [inflation], but we still have some work to do.”
• John Williams (New York Fed President) said, “The bond market is suggesting much higher r-stars [the “neutral” rate of interest], but I would discount that a bit because they’ve tended not to be reliable.”

In a light economic calendar, it may make most sense to just take the Fed at its word. The data is murky but the Fed, save Governor Stephen Miran, seems to be clustering around the notion of taking a more cautious approach on future rate cuts. The market is currently pricing in another 25 basis points cut with a 72% probability, which is up slightly for the month. This suggests that the market is not quite buying into Fedspeak for the moment. Of course, the market may be discounting December as a mostly cemented cut and listening intently to the rhetoric with an eye toward cuts in 2026—cuts whose odds have been quietly diminishing.

FROM THE DESK

Agency CMBS — No major changes to our market, week over week. Spreads were largely flat. The Ginnie Mae market is struggling in REMIC execution. But a lack of supply, not helped by the government shutdown, is keeping a lid on spread widening. DUS loans are still trading well, with large block and full-term, interest-only (FTIO) structures maintaining their prime spot for investor preference.

Municipals — AAA tax-exempt yields were relatively flat throughout the yield curve, week over week. Last week saw an uptick of primary new issuance: several housing deals priced. Spreads remained consistent with prior weeks for short-term, cash-collateralized bonds and tightened slightly for FNMA M-TEB deals. With the holiday-shortened week coming up, new issuance will drop significantly to under $6 billion. Meanwhile, there are only four more full trading weeks left in 2025—in those weeks, we expect heavy issuance through mid-December. Finally, municipal bond funds saw a sixth straight week of inflows, with $1.3 billion entering (YTD inflows of $22.85 billion); high-yield funds received $277 million of those inflows.  

ECONOMIC CALENDAR FOR THE WEEK

 Source: Bloomberg.

Source: Bloomberg

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