Payrolls on Friday might be dominating the outlook, but the real story is the yield

Outlook

Payrolls on Friday might be dominating the outlook--170,000 jobs expected in Jan (from 256,000 in Dec)—but the Real Story is the yield. Falling inflation feeds falling yields and that’s what we got yesterday with the ISM service sector prices paid. For the bond market to latch onto a sub-index is pretty rare. There had to be something else. There was—TreasSec Bessent saying deregulation will bring more private sector investment and "interest rates will take care of themselves and the dollar will take care of itself.”

This nugget comes from a Fox news interview captured by Reuters. Bessent said “while Trump wants lower interest rates, he would not ask the Fed to cut them - putting the emphasis instead on getting 10-year yields down.”

A gold star for Reuters—nobody else has this story, presumably because watching Fox is pure torture. We force ourselves to do it every once in a while for your sake, Dear Reader, but not lately because Fox lies, mean spirit and misinterpretations give us a headache.

It’s never safe to draw inferences about what Trump might do because he is deliberately unpredictable, but if Bessent is right, Trump will not attack Mr. Powell and the Fed. However, deregulation is a big, fat, complicated thing and at this point, hardly seems to suffice to bring down inflation to the point it brings down the term premium, too, already artificially low. So it won’t work, but we won’t know that for some months. l

What will bring down inflation will likely be the consumer getting scared and pulling back, facing an equal amount of supply side higher costs. Wil the higher costs outrun the consumer? The consumer thinks so and intends to spend less and save more. The new consumer surveys are now worth reading.

Forecast

We can support the idea of the dollar continuing to fall if we buy into a bunch of assumptions all at once. First is the 10-year yield slipping downward because of service sector prices falling, implying cost pressures are indeed lower in the US and the Fed will take notice. Second is the idea that the mass of jobs data all together show a weakening job market, giving the Fed the chance to name that as its guiding rule. Third is the idea that the TreasSec believes deregulation will deliver investment and that will drive down yields. And falling relative yields are dollar-negative.

Another idea is that global tensions are high due to Trump’s intemperate and reckless statements but everyone knows he is a liar and reverses himself when it looks like he’s losing, so we get risk-on instead of risk-off. This last is the most intriguing.

Bottom line, we don’t buy a dollar recovery just yet. 

Tidbit: Chicago Fed chief Goolsbee, a real economist who can speak plain English, says it’s a mistake to pretend the Trump trade wars will not have economics impact.

Tidbit: The NYT explains why Friday’s payrolls will be a confusing mess. 

Remember the August revisions? They were preliminary and showed roughly 818,000 fewer jobs in 2023 and early 2024 than initially reported.

Friday’s revision will count jobs total for every month since March 2023 and “will almost certainly be the largest in recent years, possibly the biggest downward adjustment since 2009. That will make job growth during the Biden administration look weaker than previously reported.

Think twice: “Still, the updated numbers aren’t likely to change the basic narrative of a solid labor market. They could even make the recent slowdown in hiring appear more muted, because they will make the large job gains in 2023 look smaller.”

The household survey will be worse. “But for a variety of reasons, the Census Bureau has struggled to fully account for the surge in immigration in recent years, leading it to underestimate the rate of population growth. In December, the bureau released new figures using an updated methodology that its experts believe better captures recent immigration — and that showed much faster population growth in 2023 and 2024.

The jobs report on Friday will be the first to use those new estimates.

“But, consistent with its past practice, the government won’t revise any of the historical household-survey data. Instead, the new population numbers will show up as a huge, one-month increase in virtually every measure that is based on them.”  This could be 2 million people, making all the rates jump. Ratios will remain the same, thank goodness.

Tidbit: Musk’s minions are now pawing through Medicare and Medicaid records looking for fraud. We are pretty sure they will find some, but that’s not the point—he should not be allowed to see private information in the first place. The correct way to find inefficiencies is to hire qualified people, do the background checks, and hire fact-checkers to fact-check them. Over a third of all people use one or the other. Make a guess what proportion will lose their benefits unjustly. 

The NYT has a long list, plus stories of who is suing. The ever-litigious Trump plans to take all the cases to his lapdog Supreme Court. See a sample from the front page late yesterday. Liberals have their hair on fire but also the conventional who like the law and the norms, and see Trump’s entire stance as sabotage, not reform.

All this may not have anything to do directly and immediately with finance, but the economic consequences may be big and bad. People who now must pay for healthcare will not be buying socks and steak.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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