If you were following along last week (well, I guess technically it’s still “this” week, but you know what I mean), I hope you surmised that at least until the NFP print came down, the market action wasn’t encouraging.
Specifically, stocks and bonds sold off together, suggesting that equities aren’t really ready to stomach an aggressive Fed (of course the irony there is that one of the reasons the Fed has to be so aggressive is that record high stocks have served as the catalyst for a loosening of financial conditions). Have a look at how things were trading heading into Friday’s jobs number:
Find me a hiding place there.
With that in mind, consider the following color from Barclays as you ponder how we’re set up for the Fed.
Risk-free yields continued their march higher, driven in part by expectations of less accommodative central banks: having risen more than 15bp last week, 10y Treasury yields are up another 10bp (through Thursday) and are now at the highest level this year, while 10y bund yields have increased nearly 20bp in March. Although the ECB made no changes to its bond-buying program and held rates steady, the 2017 and 2018 inflation forecasts were revised upward. In the US, following the strong ADP print on Wednesday, the implied probability of a rate hike is nearly 100%. Our economists now believe that we will get three rate hikes each in 2017 and 2018, with the risk to the forecast tilted slightly toward four hikes each this year and next. The sell-off that started in government bonds spilled over into risky assets this week. Commodities, in particular, were the biggest laggards, with crude down more than $4, while the S&P 500 index was 0.7% lower this week (through midday Thursday). Credit was also weaker, with the CDX IG index widening nearly 5bp and CDX HY down more than 1pt.