The US jobs number just came out and the figures were quite good. Two-year yields spiked on the news. So expect further curve flattening and potentially signs of a more aggressive quantitative tightening as well as a fourth 2018 rate hike in December.
Let me get this up quickly before I do a more in-depth analysis later.
Now, President Trump frontran the numbers by tweeting about them this morning. So there was widespread suspicion they would be good since he has access to the numbers the day before. The headline numbers were a 3.8% unemployment rate and a net add of 223,000 jobs, 218,000 of which were in the private sector. This was ahead of expectations.
Moreover, the nitty gritty details were also good, with hourly earnings rising 0.3% and prior months’ data showing upward revisions. The bottom line is the numbers were at the top of any expected range for outcomes and this puts pressure on the Fed to accelerate its tightening.
Because the Fed is now tightening in two separate ways, by raising the Fed Funds rate and by reducing its balance sheet, it can use either of these dials to tighten further. To the degree it does not want to accelerate its timetable of rate hikes, it can always increase its quantitative tightening campaign by actively selling bonds.
Yesterday, May ended with the differential between two- and ten-year Treasury yields at the lowest since August 2007 at 43 basis points. Recession came a mere four months later. I continue to predict the yield curve will flatten to 25 basis points after the June rate hike is in place, putting us within reach of curve inversion during the second half of 2018.