Will the real 10-year Treasury yield please stand up? That's a major question for investors this week as the S&P 500 starts the year on a modestly down note amid a raft of key economic reports. The concern is that the massive fall in Treasury yields since late October may have been overdone, but Wednesday's job openings data may help assuage that fear, with a key measure of labor force tightness easing.
Fed Meeting Minutes
Minutes from the Federal Reserve's Dec. 12-13 meeting didn't do much, if anything, to bolster the case for sooner or extra rate hikes. But that didn't worry Wall Street for a number of reasons.
First, there was no concerted effort to push back against financial markets' initial, extremely bullish reaction. Although the Fed penciled in 75 basis points in rate cuts for 2024 with its December meeting projections, markets immediately began betting on a cut of twice that size after dovish remarks from chair Jerome Powell.
The Fed policy statement still held out the possibility of one more rate hike, but Powell said the monetary policy committee was "thinking we have done enough." Even more encouragingly, Powell said, "we're very focused on not making that mistake" of keeping policy too tight.
Second, the inflation backdrop has only gotten better since the Fed meeting. A benign November PCE price index report showed that the Fed's key measure of core prices rose just 1.9% over the past six months on an annualized basis.
Finally, there was a welcome bit of good news. While the Fed has no immediate plan to slow the pace at which it's unloading assets bought early in the pandemic emergency, committee members indicated that the discussion about when to slow that process should get started. That means we can expect to hear updates on plans for tapering the Fed's balance-sheet contraction as early as Jan. 31.
Job Openings, ISM
On Wednesday morning, the Labor Department reported that job openings shrank by 62,000 to 8.79 million in November, just above estimates of 8.75 million. However, the private-sector quits rate, a key window into labor market tightness, fell to 2.4% from 2.6%. Except for early in the pandemic, that's the lowest level since January 2018.
Economists see a falling private-sector quits rate as an indication that private-sector wage growth will ease further.
The ratio of job openings per unemployed worker held at 1.4 in November, after October's figure was revised up from 1.3. That's down from a peak of two openings per unemployed worker, though modestly above the 1.2 level prior to the pandemic.
Separately, the Institute for Supply Management manufacturing survey index rose seven-tenths of a point to 47.4 in December. That edged past expectations of 47.2, but remained in modestly contractionary territory below the neutral 50 level for a 14th-straight month.
In a comment on the better-then-expected ISM report, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote: "It's hard to tell how much of this improvement is due to the lingering effects of the one-time rebound in auto production following the UAW strikes which ended on Oct. 31."
One sign that it may not last: The new orders subindex fell 1.2 points to 47.1.
Jobs Report On Tap
The week's biggest report comes on Friday. Economists expect the employers added 158,000 jobs in December, including 127,000 in the private sector. The jobless rate is seen ticking up to 3.8% from 3.7%. Average hourly earnings growth is seen slipping to 3.9% from 4% in November.
Fed Rate-Cut Odds
After Wednesday's data and Fed meeting minutes, odds of a rate cut by the March 20 meeting dipped to 71% from 79% on Tuesday. Markets now see 69% odds that the federal funds rate will fall at least 1.5 percentage points to a range of 3.75% to 4% by the end of 2024. That's down only slightly from 72% on Tuesday.
S&P 500, Treasury Yields React
The 10-year Treasury yield touched 4% on Wednesday morning, both before and after the 10 a.m. ET data releases, while the S&P 500 opened down about 0.5%, after slipping 0.6% in the year's first trading day.
After the job openings and ISM data and Fed meeting minutes, the S&P 500 extended its loss to 0.7% in afternoon stock market action. The 10-year Treasury yield, after revisiting 4%, has eased to 3.91% vs. 3.95% on Tuesday.
Geopolitics factored into the daily action, as oil prices spiked after a terrorist strike in Iran added to regional tensions.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
