January 7, 2025

QuickTakes

Bond Vigilantes Put

5% Yield In Crosshairs

The US economy continues to roar. December's ISM purchasing managers survey showed that services activity remains strong. The JOLTS data, albeit a bit stale from November, showed job openings jumped. That aligned with the recent rise in measures of business and consumer confidence. So why did stocks turn lower today? The answer lies with the bond market.

The prices-paid index in the ISM nonmanufacturing PMI jumped from 58.2 in November to 64.4 in December (chart). That was the highest reading since February 2023. That sent the 10- and 30-year Treasury yields to recent highs of 4.69% and 4.92%, respectively.

The Bond Vigilantes aren't buying the Fed's esoteric narrative that the federal funds rate (FFR) needs to be cut because the so-called neutral rate of interest is much lower than the prevailing 4.33%. What matters more to them is that inflation in the core services components of the CPI and the PCED remains sticky well above 2.0%. Long-term yields may continue rising until the Fed acknowledges the economy’s strength and officially hits the FFR pause button (chart).

We view today's economic data as good news. Much of today's stock market losses were concentrated in large tech stocks. Nvidia fell 6.2% as investors cashed in some of their recent gains in anticipation of CEO Jensen Huang's bullish announcements at yesterday's Consumer Electronics Show (CES). We found them encouraging for AI broadly. Meta slipped after announcing a new board director in UFC CEO Dana White and changes to its fact-checking program on Facebook and Instagram. High-beta stocks like Tesla and Palantir also took a hit. But the broader market held up just fine.

Here's more on today's data releases:

(1) Purchasing managers survey. December's NM-PMI increased from 52.1 to 54.1 as the business activity subindex jumped from 53.7 to 58.2 (versus 54 expected). This might reflect post-election optimism, a.k.a. animal spirits. After the strong NM-PMI, the Atlanta Fed’s GDPNow model is now tracking Q4's real GDP at 2.7%.

(2) JOLTS. Job openings surged from 7.83 million to 8.10 million in November's JOLTS report, the highest since May; we expected such strength (chart). However, hires and quits did fall. That doesn't worry us though, since initial jobless claims remained low throughout December, meaning that layoffs have remained subdued and payroll growth jumped in November. We're expecting to learn that payroll growth remained strong in December as well when the employment data are released on Friday.

Job openings were particularly large in the professional and business services industry (chart). It had recently been one of the areas where hiring was the weakest. This might be another sign of post-election business optimism and could lead to higher payroll growth among white collar workers in Q1.

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