Chart of the Day
With the ECB and Bank of England both presenting hawkish messages last week, and the US non-farm payrolls showing a surprisingly strong gain, yields rose across most economies. But looking at yield curves suggests investors are worried that some central banks will make a policy mistake. The UK curve, for instance, is now close to inverting, with the 10y-2y spread just 14 bp. Historically, an inverted yield curve has often preceded a recession, although economists are still debating whether the relationship is causal, with an inverted yield curve weighing on lenders’ margins and therefore depressing lending growth, or merely a sign investors are concerned about the growth outlook. Whatever the link, there is cause for concern in some countries.
Macro
The January non-farm payrolls report showed a big 467,000 increase, which far stronger than expectations, especially after the ADP report showed a fall in employment.
Wage growth continues to rise.
And could head further higher still.
Some good news about supply shortage – car sales have rebounded sharply now that production is rising, so we could see some downward pressure on prices.
Markets
The positive NFP surprise sent real yields up sharply.
With the Fed turning more hawkish, the latest run-up in oil prices has not been matched by a rise in inflation breakevens.
Yields have risen more in Europe than the US or Canada after the ECB and BoE meetings.
Traders are still positioning to gain from higher yields.
Positioning data suggests traders have become a lot more pessimistic on prospects for the Nasdaq and Russell.
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