Missing You — Finally, we are able to analyze economic fundamentals again. John Waite memorialized our recent plight in his 1984 hit, “Missing You,” when he sang: “Every time I think of you, I always catch my breath. And I’m still standing here, and you’re miles away. And I’m wonderin’ why you left.” (Waite, no doubt, was foreshadowing the dearth of economic data over the last 70 days.)
The long-awaited September labor report was released on November 20. Although the headline nonfarm payrolls (NFP) figure topped estimates, bond yields declined, and rate-cut hopefuls were largely displeased. Outside of the headline figure, which showed 119,000 jobs added in September, underlying details were not great. Manufacturing jobs and temporary help declined for the fifth consecutive month. The August NFP figure was revised from a 22,000 gain to a 4,000 loss, while the unemployment rate ticked up to 4.4%, the highest in nearly four years.
It wasn’t all bad though. Goods-producing jobs bounced back after four consecutive declines, adding 10,000 jobs. Similarly, construction jobs regained a footing at 19,000, after falling the prior three months. While the breadth of job gains was narrow, it was positive, marked by a slight turn around in the one-, three-, and six-month diffusions indices (Figure 1). Wage growth in September was in line with August—a 3.8% year-over-year gain—which won’t necessarily move the needle much from an inflationary impulse.
The Bureau of Labor Statistics (BLS) will not publish an October employment report but will instead incorporate October payrolls figures into its November report. However, this joint October-November report will not be published before the Federal Open Market Committee (FOMC) meets for the final time this year on December 9.
We’ve heard anecdotally that the quality of data in the NFP report, long perceived as the golden standard of its kind, has been deteriorating for some time. The NFP is composed of two surveys, one of households and another of establishments. The establishment survey reaches many businesses that retain their records and report their payroll numbers electronically. Meanwhile, the household survey—conducted via phone interviews of around 60,000 households each month—asks respondents to recall their employment status for a particular week.
Conducting phone surveys retroactively after the government shutdown would be difficult and would lend itself to statistical error. We have also heard that both response rates and the accuracy of responses have declined in recent years.
Weekly jobless claims, by contrast, likely offer a better barometer of labor market health. Claims too, have their quirks (estimation, holiday variances, citizen status, etc.). Nevertheless, they provide a somewhat less biased read on the employment landscape. For example, the NFP data has yet to show any pain from the government sector: The report suggested a gain of 22,000 jobs in September and we haven’t seen October.
But taking a look at the weekly data and isolating federal employees tells a different picture. During the first half of October, the number of federal employees who submitted multiple claims for unemployment benefits ballooned to nearly 40,000 (about 2% of total continuing claims). This number was lower than during the previous shutdown of 2018–19, but still well above the recent trend (Figure 2).
Nevertheless, broader jobless claims are in check, averaging about 227,000 weekly over the past year. For instance, last week’s print—tallying numbers for the week ending September 27—was at 220,000. Further, the trend is returning toward the long-term average after the spike in August/September. Due to this recent bout of economic strength, or at least not worrisome softness, the FOMC seems to be recalibrating what was previously thought as a done deal for a December rate cut.
According to the minutes from the October 28–29 FOMC meeting, “Many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year.” Richmond Fed President Thomas Barkin (non-voter) said, “Our outreach suggests a somewhat weaker labor market than these numbers suggest,” a nod to the anecdotal evidence presented recently by the Fed’s Beige Book, among other sources.
However, in the same minutes, “several participants” said that another cut “could well be appropriate in December if the economy evolved about as they expected” before the next meeting. New York Fed President John Williams echoed this point in a speech he delivered last Friday. “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” he said. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals [low inflation and full employment].”
As Figure 3 shows, the market has slowly begun to wind down hopes for a rate cut and expects a higher likelihood of a Santa Claus Pause from the FOMC on December 10.
December/January federal funds rate futures contracts had been weakening for nearly all of November, thereby eliminating any pricing for additional cuts. The market-implied probability of a cut sat around 63% at the market’s close on Friday, after reaching a recent low of around 30% two days earlier.
With inflationary pressures seemingly in check, the next shoe to drop is the labor market. There was something for everyone in last week’s jobs report, which is causing some of the confusion in markets. The FOMC also won’t get an opportunity to review additional monthly employment figures from the BLS by the time the FOMC makes its next decision. So far, the economic data reflects a fairly benign environment. But as John Waite may have foreshadowed back in 1984, “there’s a storm that’s raging.” We are left to ponder how close that storm is.
FROM THE DESK
Agency CMBS — Lenders and borrowers were motivated to rate lock loans before Thanksgiving. About $1.9 billion new-issue Fannie Mae DUS traded last week, significantly more than the $1.1 billion weekly average, year to date. Spreads held in well, with MBS clearing levels that were generally flat to two bps wider than the prior week. Ginnie Mae volume picked up a bit, as the end of the federal government shutdown gave lenders and borrowers a confidence boost that loans could be closed and MBS delivered on time. Ginnie Mae investors—starved from low volume for weeks—were hungry and pushed spreads three to five bps tighter, week over week. We expect that Ginnie Mae volume will remain light for the remainder of 2025 because HUD employees lost six weeks to process loan applications. It will now likely take two to three weeks to ramp up production.
Municipals — AAA tax-exempt yields were again relatively flat throughout the yield curve, week over week. We saw a large new issuance calendar last week, including more than 10 cash-collateralized, affordable housing deals. Some of those deals priced at spreads consistent with prior weeks, but some priced wider. For the first time in nearly two months, municipal bond funds saw outflows last week, with $966 million leaving (YTD inflows of $22.28 billion). High-yield funds experienced $162 million of those outflows.
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