Notes on Labor, the Fed, and Homebuilders

The June labor report posted Friday seems relatively bullish to me. It seems like another month of “soft landing” in the books, leaving the Fed quite a bit of leeway regarding monetary policy.

In my Twittersphere, the report seems to have triggered some mild reactions about Fed rate decisions. Treasury markets seem to concur. Interest rates have moved down a little bit, suggesting a bit more confidence that there will be a couple of rate cuts this year. But, the long end of the curve is still decently sloped upward, which I consider bullish. I continue to see the yield curve as a dependable recession indicator, and this is an odd yield curve for our odd time. The yield curve was marginally inverted before the rate cuts that preceded Covid. It is not inverted now.

Oddly, homebuilder stocks moved lower on Friday. Usually, there is a mortgage rate trade in the short-term, but Friday homebuilders moved lower on lower interest rates. I’m not sure what it was about the news Friday that moved builders lower. Maybe I missed an earnings report or something? I didn’t see anything obvious, just an earnings downgrade earlier in the week.

GDP growth seems like it could start coming in weak. GDPNow currently estimates real annualized growth in the second quarter to be 1.5%. Inflation seems likely to come in under 2% for the quarter. That gives the Fed more room to loosen, but at a growth rate that is not recessionary.

So, I don’t see any new trends in the data that point to a significant change in expectations. But, mulling over everything, I think I might adjust my position regarding the homebuilders a bit. That is below, for subscribers.