Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Bond Yields Are Rising Despite Slowing Jobs Data
Transcript
- Lucas: So the ADP private payrolls number came in this morning — ninety-eight thousand jobs added in June. That's a pretty clear miss relative to the one hundred thirty thousand that economists were expecting. Luna: Right, and it's the second month in a row below one hundred thousand. You'd think that would be a clear signal the labor market is cooling. Lucas: You'd think. But then you look at the ten-year Treasury yield — it's at four point four seven percent today. That's up about eight basis points in the last week. If the economy were genuinely faltering, bonds should be rallying, yields should be falling. Luna: So what's the bond market seeing that the ADP headline isn't capturing? Lucas: I think it's a few things. First, the ADP number is notoriously volatile. Last month it was one hundred fifty-seven thousand, the month before that it was one hundred twenty-two thousand. The three-month average is still around one hundred twenty-five thousand, which is not recession territory. Luna: And we also got the JOLTS data last week — job openings ticked up to seven point five nine million. That's still a very high number historically. Lucas: Exactly. Employers are still holding on to workers. The quits rate is steady, layoffs are low. The initial jobless claims number we saw last week dropped back to two hundred fifteen thousand after a brief spike. So the labor market is softening at the margins, but it's not falling apart. Luna: But the bond market is also watching inflation, right? The core PCE price index came in at one hundred thirty point one for May — that's a month-over-month increase of about point three three percent. Annualized, that's running above four percent. Lucas: Yeah, the stickiness in core services ex-housing is the Fed's real headache. The ten-year breakeven inflation rate is around two point two four percent — that's actually up a tick from two point two two a week ago. So the market is pricing in that inflation isn't coming down as fast as hoped. Luna: And the Fed's interest on reserve balances is still at three point six five percent. That's the effective floor for short-term rates. As long as the Fed keeps that elevated, the whole yield curve has a reason to stay higher. Lucas: Right. The IOER rate is the key tool right now. The effective fed funds rate is three point six three, essentially right on top of it. So the front end is anchored, and the long end is reflecting the inflation premium. That's why you get a steepening curve even with a soft ADP number. Luna: And the headline CPI for May was three hundred thirty-four — that's up from three hundred thirty-two point four in April. So year-over-year, headline inflation is still around three point three percent, depending on how you round. The Fed's target is two. Lucas: Right, and core CPI — excluding food and energy — is three hundred thirty-six point one. That's three point six percent year-over-year. So the bond market looks at that and says: the Fed is not cutting rates anytime soon. The market is pricing in maybe one cut this year, and that's not guaranteed. Luna: It's interesting because we also have real GDP growth at two point one percent annualized for the first quarter. That's not booming, but it's not a contraction either. So the economy is in this weird middle ground where it's not weak enough to force the Fed's hand, but not strong enough to generate the kind of growth that would justify higher rates on their own. Lucas: And that's exactly the environment where you get these confusing cross-currents. The ADP miss today might be noise, or it might be the beginning of a trend. The bond market is basically saying: show me more before I believe this is a sustained slowdown. Luna: A couple of dollars a month is genuinely what keeps shows like this going — buy me a coffee dot com slash fexingo, if you've gotten something out of these conversations. Lucas: Yeah, it's a small thing that makes a big difference for us. Keeps the whole thing ad-free and independent. Luna: Exactly. So back to the labor market — what's your read on the payrolls data versus what the bond market is pricing? Are we headed for a policy mistake? Lucas: I think the risk is actually the reverse. The bigger risk is that the Fed cuts too early, before inflation is truly contained, and then has to reverse course. That would be damaging to credibility. So the bond market is essentially saying: we'd rather the Fed err on the side of staying tight. Luna: And the ten-year yield at four point four seven is still below the nominal GDP growth rate, which is running around four point eight percent. So real rates are actually negative on a gdp adjusted basis. That's not exactly tight policy. Lucas: That's a great point. The nominal GDP for the first quarter was thirty-one point eight six trillion, up from thirty-one point four two trillion a year ago. That's about four point eight percent nominal growth. So the ten-year yield is about thirty basis points below that. Historically, that's not a restrictive bond market. Luna: So maybe the bond market is actually pricing in that the economy is still growing at a decent clip, and the labor market softness is more of a normalization than a warning sign. Lucas: I think that's right. The unemployment rate is still at four point three percent. That's low by any historical standard. Average hourly earnings are thirty-seven dollars and fifty cents, up about four percent year-over-year. Wages are still growing faster than inflation, which supports consumer spending. Luna: But the ADP miss does raise the stakes for the official nonfarm payrolls report on Friday. If that comes in similarly soft, the market might start to reassess. Lucas: Absolutely. The consensus is for one hundred ninety thousand nonfarm payrolls. If we get something below one hundred fifty thousand, and the ADP is validated, then you might see a real shift. But for now, the bond market is treating the ADP number as an outlier. Luna: And the job openings data supports that. At seven point five nine million openings, there are still about one point two jobs for every unemployed worker. That's not a market that's in distress. Lucas: Right. So the real story here is the disconnect between the noisy high-frequency data — ADP, jobless claims — and the more stable, trend-based indicators like JOLTS and wages. The bond market is anchoring on the trends, not the noise. Luna: Which is why we have this paradox: a soft jobs number and rising bond yields. It's not a paradox if you look at the full picture. Lucas: Exactly. The macro picture is one of moderate growth, sticky inflation, and a labor market that is tight but cooling at the edges. That doesn't scream recession, and it doesn't scream rate cuts. So the bond market is doing what it always does: pricing the most likely outcome, not the most dramatic one. Luna: And right now, the most likely outcome is that the Fed holds steady through the summer, watches the data, and maybe — maybe — cuts once in the fourth quarter if inflation cooperates. Lucas: I think that's the base case. But the market is also pricing in a nontrivial probability of no cuts at all. The fed funds futures for December are implying a rate around three point four percent — that's only about twenty-five basis points lower than today. So it's a coin flip on whether we get one cut or none. Luna: And that's why the ten-year is at four point four seven. The bond market is saying: even if the Fed cuts once, the neutral rate is higher than it used to be. The economy can handle rates at this level. Lucas: Exactly. The neutral rate — R-star — has probably moved up. With fiscal deficits running large, with ai driven investment demand, with onshoring and energy transition spending, the economy's capacity to absorb higher rates is greater than it was in the 2010s. Luna: So the ADP miss is a data point, not a turning point. The bond market is telling us to zoom out. Lucas: Yeah. And that's the macro discipline: don't overreact to one number. The trend is your friend, and right now the trend is a resilient but moderating economy with inflation that's stubbornly above target. The bond market is just reflecting that reality. Luna: We'll see what Friday brings. If nonfarm payrolls come in weak, we might have a different conversation. Lucas: We will. But for today, the lesson is: don't let one private payrolls survey move your macro view. The bond market certainly isn't.