The Week Ahead

The week started with the biggest sell-off in US Treasuries in over a decade at the start of a year as the 10-year yield climbed above 1.62%. There did not seem to be any particular catalyst to the move, however, the general consensus was that investors were re-entering the market with short positions after closing them at the end of last year. Away from rates, equities drifted higher, and the dollar was on the front foot.

On Tuesday we had the release of the ADP Employment change for December. The estimate before the figure was for 410,000 jobs added, however, the actual number came in at nearly twice that with 807,000 jobs added, up from November’s revised figure of 505,000, again supporting higher yields.

All eyes then turned to the minutes from the FOMC meeting held 15-16 December, where officials were more hawkish than expected. Indeed, as a precursor we had the Fed’s Kashkari saying he now expects two rate hikes this year (from zero in his September forecasts) and on balance sheet normalisation, he said that last time the strategy worked quite well and the FOMC will decide time and pace of the drawdown.

The minutes from the meeting showed that officials pondered faster and earlier rate hikes than expected due to rising inflation. They mentioned that they thought it would be appropriate to commence balance sheet runoff closer to that of policy lift-off than previous time. Some board members also called for reducing the central bank's balance sheet ‘relatively soon after beginning to raise the federal funds rate’. They relayed concerns about the impact of rising infections on economic activity and the possibility of ‘more severe and persistent supply issues’ as an additional downside risk. The minutes lead to the futures market pricing in a 75% to 80% chance of a 25bps hike at the Fed's March meeting.

After the release we had the Fed’s Daly saying trimming the balance sheet will follow normalising rates and even if the Fed does a couple of interest rate increases, policy will still be accommodative. Bullard also said he thinks that a rate hike could come in March and Fed may start balance sheet runoff shortly after. He said that balance sheet run-off can be passive and controlled, which wouldn’t cause disruption. He expects inflation to remain above 3% at the end of 2022.

On Friday we had the first Non-Farm Payroll of 2022. The estimates before the figures were for 450k jobs added an unemployment rate of 4.1% and participation rate of 61.9%.

The headline numbers from the employment report were a bit of a mixed bag, with the number of jobs added just 199k with the previous month’s figure revised up to 249k from 210k. However, the rest of the report was much better than expected, with the unemployment rate lower at 3.9% versus the prior month’s reading of 4.2% and the participation rate was the same at 61.9%. Hourly earnings also surprised, with MoM up 0.6% vs estimate of 0.4% with the YoY figure at 4.7% vs 4.2% eyed. The previous month was also revised up from 4.8% to 5.1%.

The numbers again lead to rates selling off, with the 30y yield trading above 2.10% and the 10y above 1.75%, both taking out the highs of last October. Equities on the other hand have reversed the small gains we saw at the start of the week, with the NASDAQ down 4.5% and the S&P down nearly 2% so far this year.

The week ahead. In the US we have the CPI release on Wednesday and Retail Sales on Friday. The Fed’s Beige Book report is also on Wednesday.  We are also scheduled to hear from Mester, George, Bullard, Barkin, Evans and Williams.

This side of the pond is quieter, with the UK data dump of November GDP, IP, construction output, services, and trade on Friday being the highlight.

In Asia we have BoK’s rate decision on Friday with both China and India inflation on Wednesday.

Fixed Income Team