10/25/24: Treasury Yields Rise Amid Positive Economic Data

Despite the sparse number of economic data releases during the week, interest rates remained volatile and biased higher. Notably, the two-year Treasury note is yielding 4.08% at the time of this writing on Friday, October 25^th, compared to 3.95% as of last Friday’s close, and 3.64% as of quarter-end (September 30^th). Further out the yield curve, yields are increasing in a close to parallel fashion since quarter-end, with the two-year Treasury note higher by 44 basis points, the five-year Treasury higher by 47 basis points (4.03%), and the ten-year Treasury higher by 44 basis points (4.22%). In the Chandler teams view, the change in yields is correlated with the more constructive economic outlook linked to upward revisions to both Gross Domestic Income and the Personal Savings Rate, along with the strong September employment report, increasing the probability of a ‘soft landing’ for the US economy. Going forward, we believe the impact of the recent hurricanes in the southeast, as well as the implications of the extending Boeing strike, are more likely than not to create some short-term negative distortions in the monthly economic data releases. We believe Federal Reserve policymakers will look through some of the upcoming ‘noise’ in the data and largely follow the forecasts put for the in the Federal Reserve’s September 2024 Summary of Economic Projections with the Federal Funds Rate being reduced by 25 basis points at both the November 7^th and December 18^th Federal Open Market Committee meetings.

Although the number of data releases this week was light, it did provide confirmation the domestic economic outlook remains sound. After spiking during the hurricanes to 260k, weekly jobless claims reverted to the recent trend at 227k this week, with the four-week moving average at 239k. The services side of the domestic economy also remains firm, with the S&P Global Service PMI remaining comfortably in expansion territory with a reading of 55.3 as of October 24^th. Next week the markets will digest a full slate of economic data, highlighted by Friday’s payrolls report on November 1^st. As of this morning, the consensus forecast is calling for job growth of 108k in October, down materially from September 254k outsized number, and reflecting the expected aforementioned ‘noise’ in the data. Provided the three-month moving average on payrolls gains can stay above 150k over the next three to six months, we believe the probability of a constructive outlook for the US economy will remain in place. The advance estimate of Gross Domestic Product (GDP) will be released on Wednesday, October 30^th, with the Bloomberg consensus forecast a strong 3.0%, continuing the trend of above trend growth. Market participants will also get an update on the progress of declining inflation, with the Personal Consumption Expenditures (PCE) Index headline and core reports released on Thursday. The Federal Reserve targets a core inflation reading of 2.0%, and the PCE Core number is trending in the right direction, but still above the target with the year-over-year number expected to come in at 2.6% next week.

The increase in interest rates since the end of the quarter we believe more accurately reflects the underlying strength of the US economy as well as a more realistic trajectory for monetary policy. The Chandler team expects the Federal Reserve to adjust their policy stance to become less restrictive via gradually reducing the Federal Funds rate at coming meetings. We also believe the Treasury curve will continue to steepen, with the spread between the two-year Treasury note and the ten-year Treasury note continuing to widen from the current 14 basis points.

Next week: S&P Core Logic Case-Shiller Home Price Index, Consumer Confidence, ADP Employment, GDP, Personal Consumption, Employment Cost Index, Personal Income, Personal Spending, PCE Inflation, Jobless Claims, Chicago PMI, Payrolls report, and ISM Manufacturing

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