By 
Vital Statistics:
Stocks are higher this morning as we enter a big week for data. Bonds and MBS are down.
The week ahead is packed with data, although today is light. We get home prices and the employment cost index on Tuesday, the Fed decision on Wednesday, and the jobs report on Friday.
In addition to these big events, we will also get the ISM data, productivity, and quarterly refunding data. The last few auctions didn’t go well, so the bond market will be super-sensitive to those.
Wall Street Journal Fed-whisperer Nick Timaros suggests that the big increase in long-term yields over the past two months gives the Fed the leeway to stop hiking rates as the jump in long-term rates has the effect of two or three hikes in the Fed Funds rate.
The December Fed Funds futures are a lock for no change at this week’s meeting, and they have been quietly reducing the probability for a hike in December. We now stand at a 25% chance of a rate hike in December versus a 33% chance a month ago.
Jerome Powell has suggested that the increase in long term rates is because investors are demanding a higher rate to lend money for the long-term. That is one explanation. Historically long-term rates are higher than short-term rates and the the yield curve has been inverted for a long time.
I discuss another possibility in my latest Substack article, which is that economic bears have been calling for a recession that hasn’t materialized, and they are losing conviction of that viewpoint. Historically such a dramatic increase in the Fed Funds rate would cause a deep recession. Like the psychology of stock investors in the late 90s and real estate investors in the mid 00s, people are rationalizing that this time is different. It usually isn’t.
Friday’s jobs report will probably include some noise from the UAW strikes. It looks like they have an agreement in principle with the Big 3. The UAW was able to get a 25% increase over 4 years and automatic cost-of-living adjustments. The union was seeking a 40% increase while the auto companies were offering 15%. The union demands for a return to the old social contract, including defined benefit pension plans, and a 32 hour workweek (with pay for 40) didn’t go anywhere.
Note that pharmacists are going on strike as well at CVS and Walgreens.
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