A mixed bag of economic data causes constant recalibration in rates

U.S. economic data

Last Friday, the August change in Nonfarm Payrolls came in at +187,000, outperforming expected levels of +170,000. Healthcare was the largest contributor adding 71,000, followed by leisure and hospitality and construction. On the other hand, June and July’s payroll numbers were revised lower by 110,000 and the Unemployment Rate ticked up to 3.8%, which is the highest level seen in 18 months. These gains in August payroll in conjunction with rising unemployment reflected an increase in workforce participation. Additionally, on the labor market front, the JOLTS report showed that job openings, layoffs, and quits all fell in July, with the number of job openings edging to the lowest level observed since March 2021. The reports together underscored both the normalization and moderation that is occurring in the U.S. labor market.

Additional data reports for U.S. GDP and Consumer Confidence came in cooler than anticipated, which fueled expectations of a pause in rates from the Federal Reserve. While still solid, Q2 GDP was revised lower from 2.4% to 2.1%. In the updated reading, inventory investment was revised lower but was partially offset by consumer spending which was revised higher. Consumer Confidence came in at 106.1, a 3-month low, but in line with the year-to-date average. While neither reading was overly concerning, the data showed a cooling but robust U.S. economy and led to increased confidence in the ability of the Federal Reserve to orchestrate a soft landing.

Finally, on Friday, ISM and PMI manufacturing reports both came in stronger than expected, including increases across the board in areas of production, employment, and prices paid. The data caused a recalibration from investors and led to a rebound in rates.

Interest rate update and the Federal Reserve

Over the course of last week, rates fell significantly in the first four days but whipsawed in the final session. The 2-year U.S. Treasury rate fell nearly 30 basis points from Monday to Friday morning before climbing back 13 basis points on Friday, ending at a level of 4.88%. Given the dip, we observed an increase in conversations and execution of interest rate hedges over the last week. The 10-year U.S. Treasury rate fell 15 basis points, ending at a level of 4.08%. Particularly for companies that had been contemplating hedging outstanding floating rate debt over the next two to three years, the drop in rates caused some to pull the trigger and execute. With the volatile nature of the current market, we encourage companies considering hedging to proactively get ISDAs in place with bank counterparties in order to quickly execute trades if there is a dip in the market.

Looking ahead to the upcoming FOMC meeting occurring September 20^th, the market is currently pricing in a 95% probability of the Federal Reserve holding rates steady (5.25-5.50% target range). For the November 1^st FOMC meeting, the market is pricing in a 60% probability of rates holding steady and a 38% probability of the Federal Reserve enacting a 25-basis point hike. Across the 2024 calendar year, the market is pricing in four 25-basis point rate cuts. It is worth noting that swap rates reflect this market pricing, and will continue to shift as the market reacts to additional data and commentary from Federal Reserve members. Data is lighter for this first week of September, but Factory Orders, Durable Goods, and PMI data will be released throughout the week.