Analyzing the November jobs report released Friday morning, Commonwealth Financial Network CIO Brad McMillan spotlights the 10-year Treasury yield (^TNX) as a key metric to watch. He explains how yields have climbed on assumptions of imminent interest rate cuts by the Fed and expected economic slowdowns. However, stronger-than-expected hiring data challenges that narrative.
McMillan believes the report signals economic acceleration rather than slowdown. Consequently, McMillan expects Treasury yields will face upward pressure after pricing in future economic data prints.
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MADISON MILLS: Brad McMillan, Commonwealth Financial Network chief investment officer. And Brad, thank you so much for being here. What do you think the market is moving on most in this labor-- in this jobs report? What data point is most critical?
BRAD MCMILLAN: I think what the market's going to be looking at is the yield on the 10-year US Treasury. And you can actually see that in the preliminary numbers for the indices. We've seen the NASDAQ pull back a little bit more.
One of the things that has really driven the recovery in the last month certainly was the idea that the Fed is going to cut rates, that we're moving into a real slowdown. And what this jobs report tells us is not only do we not have a slowdown, in fact, to some extent we have an acceleration. We saw monthly wage growth come in above expected. And when you look at that, you say, wow, that's not a slowdown that we can fade. And I think that's really going to hit rates and I think it's going to hit more interest rate sectors such as growth.
BRAD SMITH: And so Brad, if this perhaps throws a hitch in the plans of the Fed, the market's certainly responding, you know, and very clearly here this morning at least. What does that set up then for going into early 2024 where there have been some calls for even a first quarter cut from the Fed? Does that now, kind of, push this out or take that off the table entirely?
BRAD MCMILLAN: I think it does push it off. Certainly, the first quarter was always a little bit optimistic for market participants. But I think bigger picture, what you've seen is you've seen markets talk themselves into the idea that the Fed is going to cut rates. And we've seen this several times.
The Fed says we're not going to cut rates, the market freaks out. And then everybody looks at each other and says, well they've got to cut rates, don't they? Yeah, I think so. And then the market goes back up. And then the Fed comes out and says, no we're not going to cut rates and the market freaks out again.
So this is just a normal cycle. But the bigger picture is we're still in a sweet spot. We're still in a soft landing. So we may see some turbulence in the short term. But longer term this is exactly where we want to be and that'll be good for the markets
MADISON MILLS: OK, it sounds like I'm hearing soft landing and I'm hearing ever so slightly a hint of an unspoken word that we've, kind of, banned from our industry, which is transitory, Brad. Are you seeing evidence in this report of transitory inflation at all?
BRAD MCMILLAN: I never got away from transitory. Transitory took longer than people thought. But when you look at the way it's played out, OK, the Fed got it wrong in terms of timing. But nonetheless, we're seeing this-- we're seeing the supply chain problems pretty much go away.
We're seeing energy, for example, come back down. There's a whole bunch of things that are simply not persisting as inflation. And that's exactly, again, what we want to see.
Now, does that mean, we're going back to two? I don't think so. But three is not a bad place. But it's not where the Fed wants to see, so no cuts.