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Markets Slide on Fall in Long-Term Yields

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For most of today’s pre-market, which saw new PCE and Jobless Claims data confirm the overall direction of the economy, traders were pushing indices further into the green. A half an hour after the opening bell, markets were trending into the red, and only the tech-heavy Nasdaq managed to climb back into positive territory by the close: the Dow was -0.56%, the S&P 500 -0.09%, the Nasdaq +0.13% and the small-cap Russell 2000 -0.26%.

Around that time in market trading today, we saw October PMI Manufacturing prints from both the S&P and ISM, with results muted and headed lower; both reports demonstrated weakness in the Manufacturing sector overall. These were below 50 at 47.7 for the former and 49.0% for the latter, from previous reads 47.6 and 50.2%, respectively; we saw similar disappointing Manufacturing data beneath the headline of yesterday’s private-sector payroll report from ADP (ADP - Free Report) , which lost -100K jobs in the month of October.

Construction Spending also came out this morning after the open, -0.3% on headline, 10 basis points lower than anticipated and the previous month’s print. As we mentioned with this morning’s PCE data, we are looking back a bit, to the month of October. That said, this weak data is from an environment that saw interest rates 75 basis points (bps) lower than they are currently, and even more from where rates are headed mid-December. In short, don’t expect much of a bounceback in goods-producing and -servicing industries in our current climate.

Perhaps what spooked the market, in lieu of what many expected to be a big year-end rally starting yesterday, is a big drop in 30-year bond yields: 20 bps today alone, to a level of 3.60%. This puts the 30-year marginally lower than the 5-year, to say nothing of the 2-year yield, which is 4.23% — itself the lowest since September 20th. We’re also inverted now by more than 70 bps on 2’s and 10’s. These are all signals of a pending reduction in economic growth looking into 2023.

So it’s a check-mark in the column that argues for a recession in 2023, and is banking on a pivot in Fed interest rate policy. To be clear, this is only one economic indicator… but it is the bond market, which routinely pegs coming economic developments better than the day-to-day equities markets do. In any case, this helped pumped the brakes on a steamrolling rally through the end of the year; we’ll see tomorrow whether jobs figures do the same thing.

Tomorrow morning brings us another big economic report: nonfarm payrolls for the month of November from the U.S. Bureau of Labor Statistics (BLS). Like with the ADP report Wednesday, expectations are for lower job gains month over month; if the private-sector scenario holds for BLS — and these monthly numbers, while often align with revisions over time, often report initially apart — then nonfarm payrolls will come in below expectations.

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