New Data Suggest Interest Rates Could Explode Lower
What this covers
October payrolls were exceptionally weak, yet LT rates jump? With more rate cuts from the Fed basically assured, questions swirl around the Treasury selloff having many people wondering if there is a 'Trump trade' going on here. The answers are right there in front of us.
Eurodollar University's conversation w/Steve Van Metre
https://www.eurodollar.university Twitter: https://twitter.com/JeffSnider_EDU
Source description (no synthesized summary yet).
Despite short-term market movements driven by election expectations and the 'Trump trade,' fundamental economic weakening—evidenced by deteriorating labor markets, manufacturing decline, and downward revisions—will ultimately force interest rates lower regardless of political changes or Fed messaging.
- Employment data shows consistent weakness: payroll revisions reveal 20% job losses, ISM employment index in recession territory for 4 straight months, hours worked stabilizing before anticipated decline
- Manufacturing sector leads overall economic deterioration: ISM at 46.5 (lowest since July 2023), backlogs falling despite production cuts, signaling future weakness in a leading indicator
- Short-term interest rate expectations (term SOFR) remain anchored to rate cuts despite market noise, suggesting Fed and markets both expect economic deterioration that will override political optimism
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The 'Trump trade' (buy stocks, short bonds expecting higher interest rates) is primarily driven by market psychology seeking something different rather than by genuine economic fundamentals, because macroeconomic conditions are weakening regardless of who becomes president.
“a lot of the time in these types of periods where things are going in the wrong direction the idea is something different just give me something different and I can hang my hat on that...in many sense the Trump trade is simply just it's different it's not the same as where we are and therefore because where we are is not heading in the right direction there's a possibility the market will argue about how big a possibility that is that something different will actually lead to something good”
Large economies are like oceangoing ships that don't turn around overnight; when they go too far in the wrong direction, it's not easy to reverse course through policy promises
“we know that the macroeconomy doesn't work in that way it's it's like the you know some big oceangoing ship it doesn't turn around overnight and when it gets too far in the wrong direction it's not so easy to bring it back and rescue it with promises to do certain things”
Interest rates have risen substantially since mid-September but remain within historical norms, and the fundamental economic picture supporting lower rates has not changed materially despite short-run market fluctuations.
“we look at interest rates that are rising and they have been since the middle of September and they've made a pretty substantial move but they aren't out of the historical norm and as always the fundamental picture which is what really matters that hasn't really changed”
Despite market positioning for higher rates under a Republican administration, macroeconomic forces will drive interest rates lower regardless of political outcomes or Fed actions
“while Traders and investors are taking that position the forces of the macroeconomy are going to lead to lower interest rates no matter no matter who's President who's in Congress or what the FED does”
The Fed cutting rates is less about actually stimulating the economy and more about creating the perception that the Fed is taking action
“we could argue they're not going to do anything other than look like the FED is doing something that's really all that matters here”
Average hourly earnings rising is not a signal of labor market strength; it is a typical pre-recession pattern that occurs when businesses lay off lower-wage workers while retaining higher-wage workers, mechanically increasing the average wage.
“a lot of people are going to focus on hey average hourly earnings went up well guess what they tend to go up going into every recession so that's not really any news to follow because it makes sense if I've got three employees and I get rid of my worst one well I'm probably going to give my two best ones a little bit of a race to stay on but if I cut their hours that's even more significant”
Electoral politics do not meaningfully change fundamental economic trajectories; the 2008 example shows that even the drastic change from Bush to Obama made no difference to the labor market deterioration in 2009, the worst half-year since the Great Depression.
“the best example of that 2008 we go back to 2008 and of course we're not saying there's there's a crisis in the same level of recession and contraction in 2024 as it was in 2008 but there was that same type of impulse that okay Barack Obama wins the presidency very different tone and tener from George Bush's presidency and everything else leading up to that and the entire marketplace around the world was begging for something different because everything was going wrong and Obama represented a huge change from where Bush was and it made absolutely no difference because you get to the first half of 2009 was the worst half year in the labor market and the global economy since the Great Depression”
Businesses have stopped hiring (as shown by establishment survey, JOLTS data, and household survey conversions from full-time to part-time employment) because they recognize the macroeconomy does not justify investment in new employees.
“we've been talking about this all year it's the lack of hiring we we've they've been we've been featuring that and focusing on that since last year businesses stopped hiring people and that has shown up in all of the that including now the establishment survey they don't want to hire because they realize the macroeconomy is not worth you know their investment in new employees”
Multiple labor data sources (establishment survey, JOLTS, household survey) consistently show businesses trimming workers and reducing hours, indicating businesses are taking escalating steps toward cost management.
“you see various different data sources not just the payroll reports jolts is another one that suggests that businesses are taking even bigger steps toward managing their cost the household survey for employment they're even though they don't track individual hours we see conversion from full-time to part-time which is another big indication that nobody's hiring businesses or trimming workers”
The ISM manufacturing report for October showed a headline index of 46.5 (down from 47.2 in September), the lowest reading since July 2023, with the employment index at 44.4, marking four straight months at or below 46—firmly in recession territory.
“the ism report came out on Friday and that was pretty ugly the headline number was 46.5 which was down from 47.2 the month before this is for October that's the lowest since July of 2023 the employment index which is consistent with all the negative employment numbers we getting including the establishment survey that was 44.4 while that was half a point better than in September that makes four straight months with the employment index of 46 or less which is firmly into recession territory”
Despite inaccuracy and noise in payroll reports, the BLS consistently biases data higher (in the optimistic direction), even with higher response rates
“it's interesting isn't it that despite the inaccuracy and the noise of the payroll reports they only seem to go One Direction which is really about the struggle that the uh the bean counters and statisticians that the BLS are having even with even with higher response rate they still bias the data higher which is what we continue to see”
The situation in 2024 differs fundamentally from 2016 (Trump's first election): in 2016 the global economy was moving from downturn into upturn phases, whereas in 2024 both the US and global economies are in the initial and lengthening stages of moving downward, making election timing and political effects less comparable.
“we go back to 2016 when Trump won the election the first time you're right bonds sold off in 2016 pretty sharply but that wasn't necessarily because of trump as as much as it was the fact that the economy across the rest of the world in 2015 and 16 had been in a downturn and it was moving into an upturn phase whereas in 20124 the global economy and the US economy too are still in the initial stages even though it's been long period of time of moving downward”
Hours worked have been stable recently, but ISM manufacturing data showing declines in new orders, employment, and backlogs suggests hours worked will decline in the near future, which would represent the final indicator that labor market deterioration is complete.
“right now what did we see hours of work were stable but based on what we're seeing in the ISM Manufacturing sector with declines in new orders employment and backlogs it suggests that it's some point we're going to see ours work drop and when that happens in my view that's game over because that's kind of like the last straw to hit before the labor market comes unwinding”
One-month term SOFR has consistently priced in only two specific Fed rate cuts (50 basis points in September and 25 in November) and never wavered from this expectation even after September payroll data, indicating market consensus on Fed cutting plans.
“the one month term SOFR that one has never priced anything other than a first of all the 50 basis point cut in September and then another 25 coming along in November never wavered on that at all even after the September pay report came out last month”
If there were genuine economic improvement or turnaround, it would show up in data and short-term rate expectations; since it doesn't, electoral outcome is irrelevant to economic trajectory
“it wouldn't matter who takes the White House in in the next election it wouldn't matter at all it would be more of a function of is there an actual soft Landing or a change in the economy where we can see the ship turning in our case when we look at the data particularly when we see the manufacturing data we see the economy getting worse not better”
The nonfarm payroll response rate of 47.4% is so low that the report is largely constructed from incomplete data, making the entire report unreliable, and further downward revisions are likely as more responses are collected.
“the response rate was somewhere like 47.4% so the idea that there's any accuracy in this report at all to begin with from the fact that reports are inaccurate due to the data collecting method this entire report is largely made up based on half of the normal sample so as we get more responses from those prior to reports my bet is they're going to be further downwardly revised”
JOLTS layoff data for September showed a substantial increase in layoffs, and though historically still low in absolute terms, the trend of rising layoffs combined with low hirings is the significant indicator of labor market deterioration.
“that was by the way that was something that also came up in jolts for September layoffs moved up pretty substantially there well even though they're still low historically it's the trend and really that's everything we're talking about here it's the trend in everything anything related to the macroeconomy and the labor market is moving in the wrong direction”
The BLS initially reported 2.09 million job gains for the nine months of 2024 through September, but revisions have reduced this to approximately 1.7 million—a loss of 20% of reported jobs, indicating the BLS vastly overestimated job growth and the true labor market situation is worse than it appears.
“if you look at the initial reports for 2024 the nine months up until September they said that job gains were about 2.09 million which not all that great but 2.09 million was the initial report what they actually show now after just these short run revisions is just around a little bit less than 1.7 million So 20% of the jobs that they thought were gained from their initial report have just completely disappeared”
The Federal Reserve was never seriously considering pausing rate cuts; Fed chair Powell feels behind the curve and wants to cut rates, as validated by recent revisions to the nonfarm payroll report.
“there's no chance that Fed was going to stop cutting rates I mean we've heard from Powell before he feels like he's behind the curve he wanted to cut before we're now seeing the revisions of the nonfarm pay report they're starting to validate that they do need to cut rates”
The situation during summer 2024 deteriorated to the point that a backlash and retracement in interest rates was inevitable regardless of political outcomes, and the payroll report revisions validated that economic weakness drove the earlier summer interest rate decline.
“the real Point here is why interest rates are rising why the Trump trade would might be behind part of that to begin with is just the situation had gotten to be so ugly during the summertime there was there was going to be some kind of a backlash and retracement to begin with as you said you know the payroll reports that came out this week validated all of the stuff that went into the market interest rates going down as far as they did into the summertime”
Economic data has been consistently migrating from appearing solid and consistent with soft landing to appearing recessionary across all major indicators
“you expected that the data would continue to migrate from stuff that looks solid and resilient and soft landing and over time it looks less and less that way and more and more all the the entire list and catalog of economic reports go into the recession side”
Initial payroll adjustments suggest payrolls were close to zero in both August and October 2024, after accounting for revisions, indicating two months of near-zero or negative job growth rather than strength.
“the establishment survey was close to zero in October in August it was actually close to zero in October as well and you make some adjustments for revisions and there's a there's a there's a reasonable possibility that payrolls were negative in August as well as October that's two months not doesn't mean hurricanes or strikes there's two macroeconomic months where maybe we are getting an increase in potential layoffs”
GDP reported as looking 'really strong and resilient' in the most recent report, but this contradicts all other macroeconomic indicators pointing toward weakness, suggesting GDP data may similarly be biased upward or subject to measurement issues.
“and then you know GDP that came in last week uh you know it's looking really strong and resilient the payroll report as I said last September and a bunch of other data that looked less less uh less negative than what we were seeing heading into the to the rate cut”
Financial collateral market indications, Japanese government bond (JGB) markets, ISM manufacturing data, and payroll reports all point toward the end of the bond selloff and lower future interest rates.
“we've got markets from Japan jgbs collateral indications macroeconomic data from the ism which was pretty ugly the payroll report which many people want to set aside as is um influenced too much by hurricanes and Strikes and other one-off factors but more and more it appears especially with the revisions that as far as the labor market is concerned the one-off with September strength not the weakness that's been coming since earlier in the year”
Short-term interest rates and short-term rates derived from SOFR futures are different; SOFR itself is derived from SOFR futures but provides independent information about market expectations for short-term rates at the term horizon.
“and it's interesting when you look at term sulur and I mean term sulur not term sulur Futures even though term sulur is derived from term sulur Futures but basically the short-term interest rates or at least what the the market assesses as what short-term interest rates at term would be”