Friday’s jobs report came in with a little more pep than anyone expected. Nonfarm payrolls rose by 119,000 in September — more than double what forecasters were calling for — and it’s the strongest monthly burst of hiring since April. Even the three-month average, which smooths out the bumps, picked up nicely from 18,000 to 62,000. It’s not a hiring boom by any stretch, but it’s the healthiest pace we’ve seen since spring.
This better-than-expected payroll pop, paired with an unemployment rate that’s still low by historical standards, makes life trickier for a Fed that’s trying to figure out whether to ease up or hold tight. With markets already nervous about a December cut, this steadier job picture probably keeps the Fed parked on the sidelines through year-end.
And just as the market was digesting the job numbers, Fed officials themselves added another layer of uncertainty. New York Fed President John Williams suggested that he still sees room for a December rate cut, citing a cooling labor market and easing inflationary pressure. In contrast, Governor Stephen Miran went further, saying policy is already too tight and that the recent data — softer inflation and higher unemployment — should nudge the Fed in a more dovish direction.
But not everyone’s on board. Boston Fed President Susan Collins struck a more cautious note, saying rates are “appropriate for now” and that she hasn’t yet seen the kind of sharp labor-market downturn that would justify easing. Yes, unemployment has crept up 40 basis points this year to 4.4%, but she’s not convinced that’s enough to move.
Markets, however, are siding with Williams and Miran. Odds of a December rate cut jumped to 73% on Friday — up from just 39% the day before — as traders lean into the idea that the Fed may have to act sooner rather than later.
The University of Michigan’s sentiment gauge dropped to 50.3 — barely above its all-time low from 2022. Even the final reading of 51, taken after the government reopened, did little to brighten the mood. What’s striking is how widespread the gloom is: Republicans, Democrats, independents — nobody’s feeling particularly upbeat, and independents have gone from “cautiously hopeful” to “deeply unimpressed.” Expectations about the future have cratered, with folks saying it’s a bad time to buy just about anything significant — cars, homes, appliances — and even higher-income families are losing confidence. The middle class, after years of inflation that wouldn’t quit, seems especially fed up. Add the loss of SNAP benefits during the shutdown, and it’s no wonder lower-income households are feeling the pinch.
Here’s the head-scratcher of the moment: despite all the doom-and-gloom chatter, people have still been opening their wallets. July and August spending was strong, September car sales held up, and the Atlanta Fed predicts growth could reach 4.2% thanks to surprisingly robust consumer activity. Historically, folks panic about the economy a few times before anything truly goes wrong — expectations fall long before actual spending does. That pattern is holding. People say they’re worried, but it hasn’t changed how they behave just yet. Still, with November’s sharp drop in how people feel about their current circumstances — especially among middle-income households — the fourth quarter could see a slowdown. When fear stops being hypothetical and starts hitting close to home, that’s when spending finally cools.
CHANGES IN RATES
Treasury Market
The Treasury curve flattened overall last week — though, the 2/10-year slope ended the week steeper at 55 basis points (3 basis points higher than the week before).
Municipal Market
Yields in the municipal market rallied last week to absorb a big new-issue calendar. The 2/10 slope ended the week at 27 basis points, 3 basis points higher from the prior week.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios were slightly higher across the yield curve because of a lower Treasury yield curve and slightly higher yields for the muni curve.
Investment Grade Corporates
Investment grade corporate bond yields moved lower week over week.
Yields on Japanese government bonds (JGBs) are climbing in a way that’s got markets taking notice. The 10-year yield in Japan recently touched around 1.8%, a level not seen since about 2008. Super-long bonds (20-, 30-, 40-year maturities) have pushed up even more — 30-year JGB yields have reached 3%+ territory. The usual buyers of these long-dated bonds (Japanese insurers, life companies) are stepping back, and the big buyer — Bank of Japan (BoJ) — is reducing its bond-purchase program.
Japan doesn’t often drive global bond markets, but when it does, it matters. Some of the potential consequence from rising Japanese yields can push U.S. rates up a bit, shake equities through the currency channel, and generally make financial conditions a touch tighter than the Fed would like. Nothing catastrophic — but it’s one of those quiet pressures that can nudge the American market in noticeable ways.
What that means for the U.S.:
Political dynamics in Washington took a notable turn last week as internal divisions within the GOP resurfaced and bipartisan momentum accelerated on several oversight initiatives. High-profile Republican fractures — including prominent voices distancing themselves from party leadership — signal a potential shift in the legislative agenda's cohesion heading into year-end. At the same time, Congress demonstrated a willingness to push forward on sensitive investigations despite initial executive branch resistance, underscoring that policy and political risk are likely to remain elevated in the near term.
For markets, the key forward-looking risk centers on the reopening of the legislative calendar after Thanksgiving. Investors should watch the debate around expiring Affordable Care Act subsidies, which carries meaningful implications for fiscal spending expectations. Additionally, renewed activity on foreign-policy measures and broader appropriations could influence risk sentiment if negotiations become contentious. The bigger picture: if intra-party tensions deepen, the probability of legislative delays — and therefore greater policy uncertainty — rises.
The 5-year Breakeven Inflation Rate finished the week of Nov. 21 at 2.16%, 2 basis points higher than the previous week. The 10-year Breakeven Inflation Rate finished the period at 2.24%, 4 basis points lower from last week's observation.
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.92%, compared to a historical average of 1.68%, demonstrating very healthy and tight spread metrics.
Investment grade spreads are tight at 1.06%, 4 basis points higher than last week. Spreads have broken out for over 100 basis points and have stayed there for last two weeks. The high-yield spread is higher at 2.90%, compared to a historical average of 4.56%.
Money Market Flows (millions of dollars)
Money market fund flows were lower in total last week in all categories except tax-exempt.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were a net negative compared to the prior week.
ETF Fund Flows (millions of dollars)
Net ETF flows were up last week, compared to the week prior.
This is a holiday week with a small projected calendar at $1.1 billion.
Last week brought a mix of signals for fixed-income markets: U.S. payrolls beat expectations, with September adding 119,000 jobs, keeping unemployment low and reinforcing the Fed’s likely pause through year-end. Meanwhile, Treasury yields nudged higher across the curve, flattening slightly overall even as the 2/10 spread ticked steeper. Overseas, Japanese government bond yields climbed to multiyear highs as the BoJ dialed back support, prompting potential capital flows back to Japan that could pressure U.S. rates and add volatility to global markets. In Washington, political uncertainty is on the rise with fractures within the GOP and active congressional oversight initiatives, suggesting headline risk may persist as policymakers return after Thanksgiving.
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.