Midweek Market Watch: An Inflexion Point In The US Labour Market

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By Stephen Innes, Chief Global Market Strategist at Axi,

Last week’s US payroll data pointed to an inflexion in the labour market.

The stronger-than-expected print demonstrates once again that the US economy is poised to accelerate as the risk from Covid-19 recedes. And even if the bond and currency markets aren’t buying what the US Federal Reserve is selling, it doesn’t matter too much – at least in the Fed’s eyes – provided “Curvemageddon” doesn’t hit inside of 2022.

The Fed has provided dovish leadership in what’s a tricky year for central banks globally. A refusal to react swiftly to bond market wobbles is not a change in approach. As long as the Fed’s underlying dovish determination is undoubted through 2022, the global risk market’s sentiment could remain strong, including equities.

Indeed, this is as supportive an environment for the US as it gets bolstered by double policy supports, fiscal and monetary, which should remain pedal to the metal.

And all that needs to happen is for the rates markets to start buying into what the Feds are selling.

Perhaps US Fed Chair Powell could have been clearer on Thursday, but the basic ‘Fed message’, taking all of Fed speakers together, is that rates are staying where they are for a long while. Inflation will have to realise and sustain a little above 2% before Fed funds are an agenda item at an FOMC meeting.

When robust US data comes along, the treasury market should steepen as it adds inflation expectations. Investors need to get hold of that – the data is excellent, the Fed is leaving rates on hold for a very long time in market terms, consumers are getting mailed stimulus cheques, and the president is spending money.

And with every American set to be vaccinated by the end of the year, that should be the cause of celebration and something the markets will eventually revel in once the raging interest rates fire burn out.

Chair Powell might have been a bit tongue-tied and over-prepared on Thursday, but let’s not forget that treasury yields aren’t rising because the Fed has somehow messed up. Instead, they’re increasing for one very encouraging reason: the entire USA will be inoculated from Covid-19 by the end of 2021.

The Fed will likely remain steadfast in anchoring front-end rates close to zero as inflation rises. The yield curve’s steepness reflects the Fed’s new framework and a coming cyclical recovery rather than a driver of Fed policy itself (in the Fed’s eyes).

That, in turn, suggests the hurdle for higher yields in forcing intervention will probably have to be driven either by liquidity concerns in the US Treasury market or a tightening in financial conditions unjustified by macroeconomic fundamentals.

Improving activity data should make investors more comfortable with higher real yields that could lift reflationary assets once more, including commodity prices and more value-dominated equity indices. The sooner the US employment data picks up, it will provide a massive lift to value.

It was one of those weeks where one has to look below the surface to appreciate what happened. The general tilt to the tape on the week favours value and defensives, with energy (up 2.8%) set to be the only sector in the green heading into the week’s end. Indeed, energy has outperformed tech for the fifth consecutive week.

One thing to note, whenever the velocity of the index moves picked up, active investors moved to the sidelines, stepping back in once momentum shifted. Folks have again become momentum players, which is just exacerbating the intraday swings.

Finally, the post-Covid-19 economic boom will be driven by services. The USA is the most services-heavy economy globally and will provide the icing on the cake.

The cherries on top will unquestionably be the US$1.9 trillion of stimulus passed in the next week or two and then a massive US infrastructure package.

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