Danger Ahead?

Here’s some useful commentary from Bloomberg’s Daniel Kruger on the election, the jobs report, inflation, and the potholes and landmines that likely lie ahead.

Barring a surprise in the U.S. election, the strong U.S. labor report sets the table for a Fed Hike in December, and raises concerns about what happens next.

  • Wage gains were the biggest since 2009, unemployment fell and job gains in prior months were revised upward. The report might’ve been better were it not for a hurricane that battered the Atlantic coast, though analysts said it may set the economy up for a robust November.

  • The short-term Treasuries sell-off that would typically accompany such news appears postponed until the election outcome is determined. If Hillary Clinton wins, which is in- line with most firms’ base cases and the current polls, investors should expect a reaction.

  • The longer-term problem for the Fed comes after it raises rates. Janet Yellen will be at the helm of an FOMC whose newly rotated members are expected to be more likely to favor maintaining accommodative policy. At the same time, most of the problems that beset the world in 2016 will linger into the new year and threaten to impact her agenda.

  • Presuming the Fed raises rates this December, some investors believe officials may move to the sidelines for another prolonged wait. Futures have less than a full increase for 2017 priced in.

  • The recent rise in long-end yields around the world presents Yellen with a cautionary tale, said Brandywine Global’s Jack McIntyre.

  • Yellen’s talk of letting the economy run hot risks “playing with fire,” he said. “The long-end of the curve, if it continues to sell off, is going to do some tightening for the Fed even though they might not want it.”

  • While the Fed five-year five-year breakeven inflation rate, which measures expected price gains for 2021-2026, shows tepid 1.6% increases for the period, bond investors sometimes have an over-active appreciation for how quickly it can manifest itself.

  • Given how much duration risk bondholders are exposed to, Yellen will have reassure them that she, too, hates inflation while using language that doesn’t scare off investment in risk assets.

  • Bloomberg surveys predict the 10-year yield rises to 2.11% by year-end 2017 from about 1.77% now

  • Given decent growth amid the present challenges, those levels would constitute a successful year for the Fed chair.

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