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That seems like a strange response to most, but such was the case on Friday, where we initially focused on the poor headline jobs number, then aggressively flipped our focus to positive revisions to prior reports, a 40bp drop in the unemployment rate and rampant wage data.
The Inflationary aspects (of the NFP) were subsequently confirmed as the real focus and the market is genuinely questioning the widely held view from DM central banks for ‘transitory’ price pressures. Developed bond markets are screaming out a message and interest hikes are being priced into the rates market by the day. The fact is the Fed will almost certainly taper in November and unless we see a rapid tightening of financial conditions then the median ‘dot’ will increase in the December FOMC meeting to reflect a full hike next year.
The BoE may look to move sooner if tomorrow’s UK labour data is strong and swaps markets are pricing in 3 hikes here in Australia by the end-2022. This is one of the biggest divergences in macro - the RBA, with its guidance for no hikes until 2024, vs the market. I know who I would back, even if this week’s Aussie jobs, if as weak as feared, could see some mean reversion to the divergence.
Either way, it sets us up nicely this week – have rates markets priced in too much tightening in the years ahead or is this just getting started?
Perhaps US Q3 earnings could offer some answers on the timetable around supply-side constraints, while US CPI could also influence, where a hot CPI number and US 10-year Treasuries should be headed to 1.70%. We will be staring at a market not just looking at less liquidity but genuinely positioning for rates lift-off next year. While many in Australia enjoy new freedoms today, we’re staring at a remarkably different position to market pricing for 2022 – I guess this all leads to a higher volatility regime.
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