On January 7, after the weak non-agricultural data was released, the 10-year US bond interest rate first fell and then rose, with the highest rising above 1.8% and finally closing up 4.3bps at 1.77%. While real interest rates rose sharply, gold closed strong. There is an unconventional differentiation between the intuitive non-agricultural reading and the trend of US debt, real interest rate and gold. Extraordinary market fluctuations often reflect an unusual macro picture. Below, we will interpret the reasons for the weakness of non agriculture, reassess the Fed’s policy objectives, and try to clarify the trading logic of the market.
Epidemic situation and seasonal adjustment methods dragged down non-agricultural data in December.
Non farm data deviated from unemployment rate and employment rate again after November. The reading of new non-agricultural employment is weak (an increase of 199000), and the overall number of employment (an increase of 651000) and unemployment (a decrease of 442000) are strong. Similar to November, the abnormal seasonal adjustment continued to drag down the reading of new non-agricultural employment. In December, the non-agricultural seasonal adjustment was 127000, much lower than the average of 347000 in the past 10 years. The number of seasonal increases was too low, which dragged down the December non-agricultural employment data. In December, the death rate of covid-19 in the United States began to rise, so the epidemic situation is also one of the reasons for the weak non-agricultural data.
Is it certain that the Fed will raise interest rates in March? Not necessarily.
The Fed has been “powerless” in the face of employment targets. At present, it takes time to repair the labor participation rate, but high inflation does not seem to allow the fed to wait.
The good news is that the inflation base effect and the recent epidemic development can strive for policy space for the Federal Reserve in the first quarter. The base effect and the slowdown in the growth of commodities have led to a decline in the growth rate of inflation in the United States this year. The epidemic is raging again, and the Fed’s judgment of “event inflation” can be maintained in the short term. There is similar policy space for “temporary inflation” in the first quarter of this year and 2021.
In the face of the surging epidemic and the inflation growth reading of the possible decline in the future, the most cost-effective approach of the Federal Reserve may be to release austerity expectations with hawkish remarks and “politically correct” to suppress inflation. However, we can favor doves in action and enjoy the success of inflation reduction, so as to pull policy space for employment recovery. When the epidemic ended, the Fed’s judgment of “event” inflation went bankrupt and had to accelerate austerity. Therefore, we judge that the first interest rate increase by the Federal Reserve is in May. However, if the epidemic situation drops rapidly in the first quarter, it is not ruled out that the Federal Reserve will announce an interest rate increase at its meeting in March.
How do you view the rise in US bond interest rates after the non farm data? Tightening expectations temporarily dominate the market.
The December non farm report was mixed on US debt. The low reading of new non-agricultural employment is a positive factor for us debt (i.e. downward interest rate), while the higher than expected month on month growth of wages and the not bad unemployment rate are negative factors for us debt. After the mainstream narrative is determined, the market moves in the direction of minimum resistance. At present, the primary concern of the market narrative is to shrink the table, that is, the Federal Reserve tightened more than expected. The recent performance of the US bond market is that the real interest rate drives the nominal interest rate upward, while inflation expectations fall. It means that the tightening of market pricing policy will suppress future inflation, and the tips liquidity premium will rise due to the tightening. At a time when the number of inpatients and ICU inpatients in the United States is soaring, and the covid-19 mortality rate is beginning to rise, we need to always pay attention to the shift of market trading logic. That is, the downward risk of US bond interest rate due to the market’s misjudgment of the severity of the epidemic. After the sharp rise in real interest rates, gold still closed higher, indicating that some investors seem to have begun to pay attention to the possibility of miscalculation of the epidemic.
Risk tip: the Fed’s interest rate hike is faster than expected; Geopolitical risk; The risk of runaway inflation.
