Markets Falter on Day Two of British Bond Buying

Markets Falter on Day Two of British Bond Buying

September 30, 2022

From the desk of Vance Howard:

There was a rally yesterday when the Bank of England bought 1.415 billion pounds ($1.55 billion) of British government bonds with maturities of more than 20 years; the second day of a multi-billion pound program designed to stabilize the markets. But today the markets continued to trade in a very violent manner and came down to re-test the 3,600 area on the S&P 500.

I had a meeting today with a friend of mine who is a Principal at GTS Securities. He told me he had lunch last week with Jamie Dimon, the CEO of JPMorgan, and asked him his thoughts on the market. He stated there was over two trillion dollars of household cash on the sidelines. This is obviously a big number and could help put a damper on a recession. That is not to say that we are not going into a recession, but it could help with a soft landing.

The bond market has sold off and has some more room to the downside, but bonds are starting to look like they could be a buy in the not-too-distant future. Be patient, the bond market will come back at some point, just not today.

Initial claims for unemployment insurance dropped 16,000 last week, down in six of the past seven weeks, to 193,000, the lowest level since April. This was below the consensus of 215,000 claims and followed a downward revision of 4,000 to 209,000 claims in the previous week. The four-week average of claims fell 8,750 to 207,000, a four-month low. The trend is only modestly above its cycle low back in April and is hovering near its pre-pandemic level.

Additionally, continuing jobless claims in the prior week fell 29,000 to 1.347 million, its lowest level since mid-July and near its lowest since 1970, while the insured jobless rate was unchanged at 1.0%, close to the record low of 0.9%. This report reflects that labor demand remains strong, despite aggressive efforts by the Fed to tighten financial conditions and cool down the economy. But the Fed policy impact on labor market conditions comes with a significant lag, is more pronounced in fast tightening cycles, and varies by industry. We find that the real fed funds rate leads private sector payroll growth by 12-18 months. It implies softer labor market conditions by the spring of 2023, and elevated risk of recession also around that time.

Vance Howard

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