Since this summer, safe haven assets have been catching a bid and outperforming across the board.
Investors are paying attention to growth indicators like ISM and PMI data. Other investors are looking at CPI and paying extra-close attention to the Fed…
Here's the US Core Inflation Rate along with the 7-10 Year Treasury Bond ETF $IEF. Since inflation peaked and rolled over in 2022, bonds have been building a massive base:
However, similar to economic growth data, inflation is a lagging indicator.
The same is true for employment.
Here's the unemployment rate along with the 2s/10s spread.
We are starting to see some pressure in the labor market, which goes hand-in-hand with rising treasury spreads.
July job openings dropped to 7.67 million, the lowest since January 2021. This marks a significant decline from the March 2022 peak of 12.2 million.
There were only 1.1 jobs for every unemployed person, down from 2.0 last year. Major declines were seen in healthcare, government, and transportation. Voluntary quits decreased to 3.3 million from 4.5 million, reflecting reduced worker confidence.
The bottom line is that economic data continues to support our bullish bonds thesis. Whether it is growth, inflation, or jobs numbers... it all points to an environment where we want to own bonds.
But let's think back to what sparked this bullish view in the first place.
It had nothing to do with any of those lagging indicators. While everyone was waiting for job numbers, we were buying bonds.
We've been talking about bonds since the start of August, just prior to the market's sharp decline.
While those trades have been going great, lets talk about some other areas that are benefiting from this action in the bond market.
The most rate-sensitive sectors have already come out of bearish-to-bullish reversal patterns. Just look at the recent outperformance from XLU, XLRE, and XLP.
These bond-proxy groups are the new market leaders.
REITs and utilities benefit from lower interest rates because they can borrow more cheaply to finance their operations. Their high yields also become more attractive to investors as interest rates fall.
We like buying REITs, we want to own more utilities, and we definitely want to own bonds.
In other words, we want our defense on the field right now.
Countdown to FOMC
The fed is giving us a clear indication these days that we’ve seen the peak in interest rates for now. The odds of at least one rate cut at the September meeting in a few weeks is at 100%. The odds of a double cut is currently 39%.
