Round up
Weekly Bond Commentary
Can investors avoid the 0.99 trap? Behavioral economics posits that consumers are more likely to purchase a product if it is priced a smidge below a whole number. Gasoline at $3.99 a gallon “feels” better than $4, even though it’s just the difference of a penny. As of Friday, the markets seem to be wise to the Labor Department’s announcement that employers added 199,000 jobs in November. You have to mentally round that up to 200,000, and investors appeared to do that, pushing the prediction of the first Fed rate cut to May from March, as measured by the fed funds futures contracts.
But the markets still give material odds that March is still in play and that the Fed will ease upwards of four times next year. That indicates a lack of belief in what Fed officials have been saying, namely that they want to crush inflation, not just lower it. It’s as if investors brushed off Chair Jerome Powell’s hawkish comments on Dec. 1 that it’s premature to speculate on the timing of easing, and that “We are prepared to tighten policy further if it becomes appropriate to do so.”
At the heart of the matter is an economy that refuses to roll over. While it is cooling, it is hardly getting cold. Data released last week showed factory orders fell in October and consumer credit is declining. But ISM services remain above 50, and, at 69.4, the preliminary December University of Michigan Consumer Sentiment index rose to its highest level in the past four months. The Fed likely won’t hike this week, but it’s hard to agree with market expectations of a precipitous fall in rates next year.