2 Year Yield - Treasury Yields Soar

In the 2 Year Yield, The treasury market reacted to the jobs report which I will review later in this article. The 10-year yield increased 7 basis points to 2.94%. The 2-year yield increased 7 basis points to 2.7% which is the highest yield this cycle. The curve stayed the same as the difference between the two bond yields is still 24 basis points.

Healthcare was the only green sector as it was up 0.15%. The two worst sectors were utilities and telecom which were down 1.2% and 1.24%. These are interest rate sensitive sectors.

We now have clarity on the Fed’s likely decision on rates in December. There is a 79.8% chance the Fed will raise rates at least two more times this year. It’s great to see the 10-year yield rising near 3% as it makes an inversion less likely by the end of the year.

2 Year Yield - Stocks Fall Every Day This Week

The S&P 500 is down 1.45% since its record high on August 29th. It’s getting close to the point where I can claim victory for my short-term bearishness as it was down every day this week.

This is the first week where stocks fell every day since the 2016 presidential election. I still think it will fall further as these have only been very small declines.

To be clear, I’m not bearish because September is the worst month of the year. I’m bearish because stocks were technically overbought at the end of August, there are some inklings of economic weakness, and the trade war threat is back on in a big way.

The Nasdaq was only down 0.25% as the tech sector fell in line with the market instead of vastly underperforming it. The Facebook stock increased 0.31%, but the Twitter stock was down 1.04%. I think both are oversold.

Nasdaq was down 2.6% this week which was the worst start to September since 2008. This is quite the turnaround as the Nasdaq had its best August since 2000.

There is certainly silliness to comparing each month to predecessors instead of every other month, but it’s illustrative to show how the Nasdaq was overbought and is now correcting.

The Nasdaq might not be done with correcting, but some of the worst hit names like Facebook and Twitter might be.

2 Year Yield - Trade Skirmish Looking Like A War

The trade skirmish news also could have pushed yields up since tariffs create inflation.

Latest news on tariffs is the first potential event which will have a sizeable impact on the economy if it’s enacted. President Trump stated he is “ready to go” on tariffs on $267 billion worth of Chinese goods “if he wants.”

This would be on top of the tariffs on $200 billion in goods which have been threatened, but not acted upon yet. It’s interesting that Caterpillar and Boeing only fell 0.16% and 0.55%.

Apple is getting in the crosshairs of the latest tariffs. The $200 billion in tariffs on Chinese goods would affect Apple Watch, AirPods, Apple Pencil. It also affects HomePod, Mac Mini, and adapters and chargers.

Apple stock fell 0.81%. It’s interesting to see how the tariffs will affect the stock in the most important week of the year for the company. It will be unveiling its new iPhones on September 12th.

2 Year Yield - Amazing Jobs Report

I will be discussing the details of this great jobs report in future articles. In this section, I will give an overview of the report.

Unlike the disappointing ADP report, the BLS report showed 201,000 jobs created. This beat the consensus for 195,000 jobs and was above last month’s gain of 147,000 jobs.

The worst part of this report is that the prior two months lost a combined 50,000 jobs due to revisions. The July report was pushed down by 10,000. The June report was pushed down by 40,000.

The unemployment rate was steady at 3.9% which missed estimates for a decline to 3.8%.

Private payrolls were 204,000 which beat estimates by 14,000. The manufacturing sector lost 3,000 jobs instead of adding 21,000 jobs. The July report was revised from 37,000 manufacturing jobs created to 18,000.

This is vastly different from the ISM manufacturing report. You can see the other industries’ results in the chart below.

As you can see, the professional and business services category and the education and health services category both added 53,000 jobs.

(Click on image to enlarge)

2 Year Yield - Participation Rate Falls

The two most interesting parts of this report are the employment participation rate and wage growth/overall participation rate fell from 62.9% to 62.7%. This missed estimates for just a 0.1% decline.

The total number of people in the labor force fell from 162.3 million to 161.8 million. This report includes self-employed workers, unlike the payrolls data.

The prime age labor force participation rate fell from 82.1% to 82%. These dips happen often; it doesn’t imply a new trend is forming. I like to see it decline sometimes because it means there’s still slack in the labor market.

Once this gets between 83% and 84%, the labor market will likely have little slack. Keep in mind, we already know there’s still slack in the labor market because the job creation is nearly twice the job growth needed to keep up with population growth.

2 Year Yield - Wage Growth Accelerates

Average hourly earnings increased 0.4% month over month which beat estimates and last month’s growth rate of 0.3%.

On a year over year basis, hourly earnings were up 2.9% which beat estimates for 2.8% and last month’s growth rate of 2.7%.

The average workweek was flat at 34.5 hours as expected.

I care most about the weekly earnings growth because it adjusts for changes in the workweek length. Growth was up from 3% to 3.2% which is a sizeable improvement and points to future positive real wage growth.

To be clear, that’s high weekly earnings growth for this cycle as the peak is 3.4% growth. 3.4% was hit once in October 2010 and once in June 2018.