Markets Eye Key Data Amid Rising Bond Yields, December Jobs Debacle

While headlines will invariably revolve around Donald Trump in the new week, the market will need to digest a few potentially meaningful economic data points.

Friday’s nonfarm payrolls report showed the US labor market slammed into reverse in December. As discussed here, that bodes ill for consumer spending and sets the stage for a downbeat retail sales print.

To be sure, things were already tenuous on that front. Retail sales were lackluster in November, as were personal outlays.

The US economy shed nearly a half million leisure and hospitality jobs in December. That’s doubly bad, something Bloomberg’s Chris Anstey managed to capture succinctly on Friday, when he wrote that, “with half a million fewer folks working in the leisure and services industry, (a) they are unlikely to have boosted their spending and (b) the places where they worked were unlikely to have done more business last month.”

With COVID-19 infections, hospitalizations, and fatalities surging, it seems unlikely that consumers will be keen on engaging in any kind of economic activity that doesn’t happen online. Of course, some state and local containment measures mean consumers couldn’t engage even if they were so inclined.

In addition to retail sales, CPI is on deck. This is an even hotter topic now than it was just last month, given the surge in bond yields and markedly higher breakevens.

While market participants will justifiably focus on suddenly higher real yields, rising inflation expectations and the prospect of a hotter economy under Democratic management will make investors more sensitive to inflation data going forward.

As Nomura’s Charlie McElligott wrote last week, “the potential of an ‘inflation upside surprise’ as the truest macro regime change driver, and more importantly, as the most likely catalyst for a cross-asset volatility shock, [may be] much closer to realization” thanks to the results of the Georgia runoffs.

We now have a Fed that’s explicitly aiming to engineer an inflation overshoot, an incoming Treasury Secretary determined to help bring about fiscal-monetary policy partnerships, and a Congress that will back more stimulus. At the same time, some Fed officials are talking about a potential taper of bond-buying.

The point is, the conditions are in place for bond yields to keep rising stateside, with the caveat that the rapid spread of the virus, slower-than-expected vaccine rollout, and the “scarring” effect of the pandemic should conspire to cap any long-end selloff, especially if dip-buyers emerge for Treasurys past, say, 1.10% on 10s.

While inflation is nowhere near “hot,” recent evidence and anecdotes from PMIs suggest that price pressures are building as a result of supply chain disruptions and other legacy effects of COVID-19.

Meanwhile, food prices on a global scale have risen for seven consecutive months — I mentioned that on Saturday.

Remember, the Fed’s outcome-based forward guidance is… well, it’s outcome-based. And while that’s inherently dovish in an environment where the outcomes seem miles away from being realized, it can backfire. That is: It can become suddenly (and accidentally) hawkish in the event the data suggests the outcomes are closer at hand than anyone thought.

The market will hear from plenty of Fed speakers this week, including Jerome Powell on Thursday.


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