In our previous article, we discussed how stronger economic data had caused a rise in 10-year Treasury rates and a selloff in equities over the summer. However, the situation has changed drastically in just one week.

10-year rates decline, contributing to an equity rally

Over the past 10 days, 10-year Treasury rates have dropped by 25 basis points to 4.1%, after reaching a 16-year high of 4.34%. Simultaneously, major equity indices have seen gains of 2%-4%.

Weaker job market decreases likelihood of rate hikes

Although inflation has been slowing down, the job market appeared to be strong until recently. With an unemployment rate of 3.5%, close to a historic low, it seemed that the labor market was thriving.

However, recent data suggests that the labor market is showing signs of weakness. Job openings have decreased from their peak, and new hires have returned to pre-pandemic levels. Additionally, there is a decrease in job seekers quitting, indicating a decline in labor market confidence.

Consequently, wage growth, especially in the United States, has slowed down, particularly in sectors where workers have been hesitant to return to their previous jobs.

Lower rate hike expectations for the Fed

Given the weakening labor market and falling inflation, it is believed that the Federal Reserve will not need to raise interest rates significantly, if at all. Market expectations for one more 0.25% rate hike have dropped from 67% to 45% after the latest data. Some Fed officials now believe that no additional rate hikes are necessary.

Upcoming employment data will provide further insights

The employment data to be released on Friday will be crucial in assessing the state of the labor market. Consensus forecasts expect the addition of 170,000 jobs and no change in the unemployment rate of 3.5%. Additionally, the Fed and the market will be monitoring any further slowdown in wage growth.

If the labor market continues to slow down gradually, striking the right balance between containing costs and avoiding unemployment, a soft economic landing becomes increasingly likely.