Boy, we’re really in the heat of things now.
Early Wednesday, Nomura’s Charlie McElligott called Tuesday’s macro “risk-off” narrative “#fakenews” on the way to noting the following about the inability of bonds to stage a convincing rally:
I found the inability for USTs to meaningfully rally rather “telling,” especially as many have been anticipating the potential for a counter-trend “squeeze” over the near-term.
He went on to suggest that the market was mispricing the risk of higher inflation.
Fast forward a couple of hours and the bond selloff accelerated, with 30Y and 10Y yields hitting their highest levels since 2014 and 2011, respectively.
For now, this is clearly a risk-“friendly” bond selloff, driven by easing budget tensions in Italy and, of course, more ebullient economic data stateside. The ADP beat was “bigly” and ISM services was absurd.
Wednesday’s ADP print bodes well for Friday’s jobs report and folks are doubtlessly pondering the possibility that we get another hot read on AHE, which would reinforce the hawkish Fed story, effectively forcing the market to “catch up” to the 2019 dots.
2s10s is bear steepening notably, trying to breach 30bps:
And have a look at breakevens:
This is a high volume move and in contrast with the week of September 17, the dollar is following yields, with the greenback hitting three-week highs. Oh, and commodities are surging too (thanks in part to oil, which is clearly not inclined to listen to Donald Trump):
This is all fine and good as long as market participants continue to view rate rise as indicative of (and in step with) economic strength.
But this feels a lot like January. Remember, the market’s interpretation of rising yields can turn on a dime, and this has all the trappings of an inflation scare. When it comes to rate rise, it’s the “why?” and the “how quickly?” that matter and while the answer to the first question bodes well for risk, we might soon be answering the second question with this: “Too damn fast”.