Investors home in on US data as yields zoom


Economic data have returned to the forefront for investors in US Treasuries, and may be turning the market around.
Ten-year Treasury yields staged their strongest single-day upswing since November 2016, driving the rate to the highest since 2011. The surge followed a record-high reading on activity in the US services sector and stronger-than-anticipated gains in a private employment survey.
These reports set the scene for payrolls release, which may have a more captive audience than in recent months.
One reason for that added attention is that Federal Reserve officials have stressed the central bank’s focus on incoming data. Chairman Jerome Powell this week described the state of the US economy as “extraordinary.”
“The focus certainly has shifted to the data,” said Craig Bishop, lead strategist in RBC Wealth Management’s portfolio advisory group. “I think listen to the Fed, because they’re definitely data-dependent.”
The jump in yields may signal a turning point for a market that some argue has underestimated US growth. Long-dated yields have fallen even as gross domestic product has accelerated. As a result, the Treasuries curve is near its flattest levels since 2007 and closer to inversion, which is often considered a precursor to recession. The Fed’s tightening cycle has contributed to that trend, lifting short-end rates. But it may now be paving the way for a reversal as the end of the cycle draws nearer.
Treasury yields and the dollar may now become more sensitive to data surprises, Nomura strategists wrote in an Oct. 3 research note, adding that the jobs data “will be crucial for sustaining the recent rise in UST yields.”
Specifically, they expect that larger-than-forecast job gains could drive yields higher, while a significant acceleration in wage growth could boost short-dated yields. Economists expect the data to show a gain of 184,000 jobs in September, and a 2.8 percent annual increase in average hourly earnings. Wages rose 2.9 percent year-on-year in August, the biggest increase since the end of the recession, helping crush Treasuries in September.
RBC’s Bishop is keeping a close eye on the inflation component, as he considers it too soon to call the recent increase in wages a trend.
“That’s going to be the driving factor in determining how aggressive the Fed may or may not become,” he said. “And to date, they certainly aren’t expressing any concerns about a surge in inflation.”
Bishop is also reserving judgement on the sustainability of the growth backdrop. He sees the potential for a slowdown in the coming year as the effect of fiscal stimulus begins to fade. Speaking of the economic charge from tax cuts, he said, “We certainly take the view that it’s going to be a temporary factor, not something long-term.”

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