Fundamentals

The headline number from last week’s US payrolls data print was a big disappointment: employment growth slowed sharply to 266,000 new jobs, well short of the roughly one million expected. It is possible that the current generous unemployment benefits are not creating sufficient incentive for many to go back to work just yet. Covid-related concerns also persist in some areas, which could be weighing on the supply of labour. However, while the jobs data prompts questions about the true nature of the recovery over the near term, it should be viewed in the context of a wide range of measures pointing to strong labour demand. The recent data from the NFIB Small Business Optimism Index shows a surge in the jobs-hard-to-fill measure, and hiring plans are elevated. Additionally, having spiked to 15% in 2020, the unemployment rate has fallen almost as fast, to around 6% currently. The key question is how the Federal Reserve (the Fed) will react to the employment data, particularly given the recent rise in inflation. With the employment picture looking more mixed for now, the case for continued accommodation is entrenched. The Fed is now unlikely to start discussing tapering until later this year, after an upward trend in employment data is fully established, with tapering itself not starting until 2022 at the earliest. The Fed’s position on inflation has also been very clear: it needs to see sustained, rather than transitory, higher inflation before tightening monetary policy. However, the Fed will face additional questions on the nature of the most recent inflation print. While the upside surprise was mainly in Covid-affected components, its magnitude underlines the uncertainty around the path of inflation this year. 

Other measures of labour demand in the US are strong

Source: National Federation of Independent Business (NFIB). Data as of 30 April 2021.

Quantitative valuations

In the wake of the payroll report, Treasury yields hardly moved, with the 10-year yield dropping to a (short-lived) intraday low of 1.53% before ending the day back where it started, at 1.57%. Yields have since moved higher, especially in the wake of the higher-than-expected inflation print, trading at 1.69% by the end of 12 May. Given that labour market data is likely to improve further in the coming months, and with the Fed set to keep short-end rates anchored, our bias is for steeper curves in the medium term. With the spread between 5- and 30-year US government bond yields currently around 1.55%, there is scope for this to increase (data as of 12 May 2021).

Technicals

While higher rates and steeper curves appear to be the consensus in the market, as suggested by various investor surveys, the price action following the payrolls print signalled that positioning is cleaner than expected. The absence of a significant, sustained rally in Treasuries suggests that investors may be willing to look through a near-term blip in employment data, with the expectation of a full ongoing economic recovery carrying more weight.