ACTV - Rates Plunge In A Flight To Safety Despite A Strong Jobs Report

2023-03-10 12:54:49 ET

Summary

• Rates have been a volatile ride recently.
• The jobs report was stronger than expected but was overshadowed by Silicon Valley Bank worries.
• The odds of a 50 bps rate hike have dropped, but are still on the table.

The job report for February showed a strong rise of 311,000, exceeding estimates of 225,000. However, the unemployment rate increased to 3.6% from the unusually low level of 3.4% last month. Wages rose by 0.2%, slightly lower than the estimated 0.3%, but increased by 4.6% year-over-year, up from 4.4% in January.

The uptick in the unemployment rate was due to more workers entering the job market in February, as the number of individuals not in the labor force decreased to 99.8 million from 100 million the previous month, while the total labor force increased to 160.3 million from 160.1 million in January.

Another significant and positive development was the increased labor participation rate to 62.5%, the highest level since the pandemic started. This indicates a broadening of the overall strength in employment and is a promising sign for the job market's health.

The strong job data provides the potential for a 50 basis points (bps) rate hike, but the slower pace of wage growth month-over-month means it is not a slam dunk. A strong CPI (Consumer Price Index) print will be necessary to increase the likelihood of a 50 bps rate hike. Currently, the market is pricing in approximately a 35% chance of the Fed increasing rates by 50 bps in March, which is down significantly from before the release of the job report.

It is difficult to determine the extent to which the change in rate hike expectations is solely due to the job report. The lower-than-expected wage growth and the higher unemployment rate may have played a role. However, other factors, such as concerns over Silicon Valley Bank's recent cash-raising efforts failure, may also be contributing to the market's volatility. These concerns have spread to other regional banks, leading to a significant decline in yields and a flight to safety. For example, 2-year yields have fallen sharply, by 24 bps to 4.63% today, and have seen a significant drop from around 5.1% earlier this week.

Furthermore, the CDX High Yield Index indicates that high-yield credit spreads are increasing. While these spreads are still much lower than where they were in the fall of 2022, their rise suggests that there is potential for further increases if credit conditions deteriorate. This is a significant development as the CDX High Yield Index often leads to the VIX index and implied volatility rising. In the past, the relationship between the two indices has been highly correlated, and thus, the rising credit spreads may signal a potential increase in market volatility.

The drop in rates and the potential for a 50 bps rate hike are less related to the job report and have more to do with the concerns surrounding Silicon Valley Bank and potentially other banks facing similar issues. However, even with the market's volatility, the Fed is unlikely to alter its path of rate hikes at this point due to the tight labor market and high inflation rates. If the Fed does alter its path, it will likely be due to negative news that suggests the struggles of Silicon Valley Bank and other banks are the start of a larger issue. This is a scenario that nobody wants to see, and certainly, nobody wants that to happen.

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