Treasuries, Gold, and Small-Caps

The Big Winners

The big event of the week was Friday’s jobs report, which again showed that the labor market is cooling rapidly. With August’s dismal 22K job add and revisions to the past two months, the U.S. economy has only averaged about 26K new jobs over the past four months. ADP employment numbers, which just measure the private sector, tell a similar story.

Of course, the markets took this as a positive since it likely increases the pace at which the Fed will cut rates. The market is now pricing in about a 70% chance of cuts at each of the next three meetings prior to year-end. Overall, the market seems to be saying that as long as GDP growth remains steady and positive in the background, it’s willing to overlook short-term weakness in the labor market as long as it doesn’t spiral out of control. Lower rates can fuel growth, while the jobs market holds steady if not strong.

While cyclicals were deep underperformers for the week as a whole, the big winners were Treasuries, gold and small-caps. The latter group has had a particularly strong run over the past month, fueled largely by the prospect of an imminent Fed rate cutting cycle. The 2-year Treasury yield is down by nearly 50 basis points since the end of July, but the yield curve continues to steepen. This growing yield premium could be indicative of inflation worries, fiscal concerns or just the price of doing business to get the market to absorb all of that supply. Gold’s surge has a hint of a flight to safety.