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Bond Market Insights - Mon, 05 Feb 2024

DJIA +0.35% / S&P +1.1% / CCMP +1.7% / CRUDE -2.1% $72.3 / GOLD -0.7% $2,040/ VIX -0.2% $13.85: S&P extended the record highs, supported by META +(+20%) & AMZN (+7.8%)

Boom! 353,000 jobs were added in January, the highest since January 2023. The average Joe forecaster was looking for 185,000.  The Unemployment Rate (UER) held at 3.7% while the Average Hourly Earnings saw the largest saw the largest m/m gains since March 2022, at +0.6% vs expectations of 0.3%, year on year reached 4.5%.

Powell assumed a more hawkish stance post-FOMC compared to that in December. Following Fridays data Fed's Bowman followed on to suggest that the strong labour market was an "upside" risk against Fed expectations for rate cuts this year, highlighting the "pick-up in wage inflation in recent months".

Michigan consumer sentiment revised up 0.2pts to 79.0 for January. 5-10yr inflation expectations also ticked higher, to 2.9% from 2.8%.

10yr yields jump back to 4.05%, up +23bps from Thursday’s lows, while the 5yr slipped to 4.018%. 2yrs peaked at 4.40%. before finally seeing some afternoon short-covering as yields retreated from session highs. What’s priced in? Less than 5bps for March and only 43bps for the June meeting and now only 125bps of rate cuts priced through to end 2024.

The scale of the drop in US rates is more important than picking the start date for the easing cycle. In 1995, the Fed only cut by 75bps, as the economy did not slow as much as had been expected. Could the artificial intelligence revolution that everyone is so excited about, deliver the boost to productivity needed to keep the economy pumping, so negating the need for a return to a low-rate environment?

Japan was busy last week. The new Rakuten issue (RAKUTN 11.25% 02/15/2027) was larger than expected, $1.8bn, and flew out of the door at a price of 97.83. An initial squeeze boosted the price 5pts, before fading to 101.00 on profit-taking. It is yielding 10.4% presently. Rakuten’s earnings are due 14/1/24. The big story in secondary was Aozora Bank and its exposure to US commercial real estate. Its stock sold off 33% and bonds blew out 175bps (ticker NIPPBK).

This week data is scant, but there is supply. The US Treasury auctions $54bn 3yr notes on Tuesday, $42bn 10yrs on Wednesday and $25bn 30yr bonds on Thursday. Fedspeak began overnight with Powell on CNN. He sees no change since the last meeting and still expects to make 3 cuts this year. Although he did not give a timeline, the interviewer, Scott Pelley noted that the first cut could come in “the middle of the year, a few months before the election”. There is quite a calendar of Fedspeak through the week to keep us informed. Away from the US the ECB and RBA are both expected to leave keep rates on hold.


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