Trader thoughts - the world we live in
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.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.