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Edward Bell - Senior Director, Market Economics
Published Date: 05 September 2021
The US Treasury curve bear steepened after the much weaker than expected August nonfarm payrolls number. Near-term yields remain anchored at low levels as the disappointing data will affirm market expectations that the Fed is in now rush to raise rates—yields on 2yr USTs fell almost 1bp over the week and were flat on the day to settle at 0.2061%.
Longer-run yields dropped on the immediate release of the jobs data but then quickly reversed and ended Friday higher—yields on 10yr USTs added almost 4bps on Friday to close at 1.3223%—as markets focus on the outlook for inflation, looking to the strong pace of wage growth from the August data. While it won’t have an immediate effect on the economy, the poor jobs numbers may also spur constructive debate on the Biden administration’s stimulus and infrastructure plans, also helping inflationary views in the market. The 2s10s curve bear steepened to almost 112bps, its steepest level since mid-August.
The weak August jobs report will complicate the Federal Reserve’s task in developing its strategy to taper asset purchases. In order to begin by the end of 2021, an announcement on cutting back asset purchases would need be announced at either the September or November FOMC meetings. But with last week’s soft data in hand, we doubt that September would be in play for any tapering announcement. The November meeting too could be at risk if the data flow continues to drift or actually gets worse. There will only be one more jobs report before the November 2nd-3rd meeting (that for September) while we will get two inflation prints, August and September, which are likely to remain elevated at greater than 5%.
The apparent weakness in US data comes amid signs of a broader slowdown in global growth related to the spread of the Delta variant of Covid-19, particularly among countries with low vaccine rollouts to date. Supply chain disruptions aren’t likely to be addressed immediately, particularly as manufacturing hubs across Asia have seen output decline thanks to lockdowns and other restrictive public health measures.
Our current targets are for the 10yr UST yield to hit 1.55% at the end of Q3 and 1.75% by the end of the year as the Fed outlines a tapering plan. The downside risks to those forecasts are clear with our end of Q3 expectation looking particularly exposed. However, until we see the next inflation print—due mid-September—we will hold our views for the Fed to announce a tapering plan and yields to be able to move higher by the end of the year intact.
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