Duration Dashboard: Jobless Claims Drive Yield Compression

The week's Treasury market action crystallized around two pivotal data releases that painted opposite pictures of the economy. Wednesday's unexpected PPI decline of 0.1% initially sparked a duration rally, with yields moving lower before Thursday's CPI acceleration to 2.9% year-over-year partially reversed gains. Yet the true market mover came with Thursday's jobless claims explosion to 263,000, immediately shifting the narrative from "higher for longer" to "employment emergency." The 30-year bond's 8 basis point weekly decline despite remaining at the 84th percentile of its 5-year range suggests investors see the Fed pivot as insufficient to prevent economic deterioration.

Credit Pulse: Historic Compression Despite Deteriorating Fundamentals

Credit markets entered uncharted territory with investment grade spreads compressing to just 69 basis points—the 2nd percentile of the 5-year range and approaching the tightest levels since 1997. This historic compression occurred despite clear evidence of deteriorating economic fundamentals, with ISM Services employment at 46.5 and Manufacturing employment at 43.8, both deep in contraction territory. The disconnect between spread levels and underlying economic reality reached extreme proportions, with high yield's 10th percentile ranking offering virtually no cushion for the earnings disappointments that labor market weakness typically presages.

Federal Reserve Policy Outlook: Emergency Pivot Despite Inflation

The Federal Reserve entered its pre-FOMC blackout period on September 7 facing the clearest policy imperative since the pandemic: abandon the inflation fight to address collapsing employment. Markets moved decisively to price this pivot, with fed funds futures showing near-certainty of a cut at the September 17 meeting, with debate centered on whether the Fed would deliver 25 or 50 basis points. The week's data flow—particularly the 263,000 jobless claims—essentially eliminated any possibility of the Fed maintaining its pause, regardless of the 2.9% CPI reading.

The technical backdrop strongly supported easing, with the September 10 auction of 10-year notes reportedly drawing strong demand with robust foreign participation. This suggested foreign central banks remained comfortable with U.S. duration despite the impending easing cycle. Corporate credit issuance remained heavy throughout the week, indicating healthy capital markets functionality, while the combination of strong technicals and deteriorating fundamentals gave the Fed political cover for aggressive action despite above-target inflation.

The $7.6 Trillion Flow Tsunami: Money Markets Poised to Overwhelm Credit

The week's most underappreciated dynamic lies not in economic data but in the staggering $7.6 trillion parked in money market funds awaiting the Fed's first rate cut. This cash hoard—accumulated during two years of 5%+ yields—represents nearly three times the entire U.S. high yield market and exceeds the combined market value of investment grade corporates trading below 100. History suggests these flows can move significantly once cuts begin: the 2019 Fed pivot triggered substantial money market outflows within six months, and current positioning dwarfs those levels by nearly an order of magnitude.

The technical implications proved visible throughout the week as investment grade new issuance met insatiable demand. Books routinely closed with heavy oversubscription and pricing consistently through initial guidance, suggesting institutional investors are front-running the anticipated money market exodus. Japanese banks led the charge with significant dollar-denominated bond issuance at spreads that would have been unthinkable just months ago. The compression to 69 basis points for investment grade—the 2nd percentile of the 5-year range—reflects not fundamental value but rather a technical squeeze as too much money chases too few bonds.

Week Ahead: Fed Decision Amid Employment Crisis

• FOMC Meeting (Sept 17-18): Fed expected to cut 25bp to 4.00-4.25% with potential for 50bp if employment data deteriorates further. Updated dot plot likely shows 3-4 cuts in 2025.
• Retail Sales (Sept 17): August data critical for consumer health assessment. Consensus -0.3% m/m as labor market weakness filters through to spending.
• Housing Starts (Sept 18): August starts expected to show continued weakness with 30-year mortgage rates above 7% crushing affordability.
• Bank of Japan Decision (Sept 18-19): BOJ expected to hold at 0.5% while announcing ETF sales, maintaining gradual normalization path.
• UK CPI (Sept 18): August inflation data crucial for Bank of England's October decision after surprising August rate cut to 4.0%.

US Economic Positioning: Fed Pivot Arrives Too Late

America's economic trajectory shifted decisively during the week of September 7-14 from "soft landing" hopes to recession reality, with the 263,000 jobless claims serving as the clarion call that forced the Federal Reserve's hand. The labor market deterioration proved particularly troubling given its breadth—spanning services, manufacturing, and even typically resilient sectors—suggesting monetary policy tightening had finally broken through with a vengeance. Yet with inflation still running at 2.9% annually and credit spreads at historic tights, the Fed faces an impossible balancing act.

Global divergence highlights U.S. vulnerability: The European Central Bank's September 11 decision to hold rates steady despite accelerating growth projections underscored how U.S. economic weakness had become an outlier among developed markets. While ECB President Lagarde maintained optionality, the unanimous vote suggested comfort with restrictive policy even as the Fed prepared to ease. This policy divergence, combined with the Bank of Japan's gradual normalization and Bank of England's measured approach, positioned the dollar for potential weakness despite its haven status. For fixed income investors, the combination of Fed easing, persistent inflation, and credit spreads at 27-year tights created a uniquely dangerous cocktail. The bull flattening in Treasuries suggested markets expected the Fed's response to prove insufficient, while credit's refusal to widen despite deteriorating fundamentals represented the last vestige of the everything bubble—sustained purely by technical flows rather than economic reality. As the Fed prepared to deliver its first cut in nearly a year, the question wasn't whether policy had pivoted too late, but rather how severe the economic downturn would become before monetary accommodation could gain traction.