Give Me Fives

March’s rosy jobs report was met with bear flattening Friday, as markets looked to reprice the Fed.

Most notably, five-year yields rose more than 7bps at one juncture, hitting 0.979%.

That’s the highest since February of last year, and appeared to suggest (again) that folks are keen to pull forward Fed hikes. “A 2022 rate hike is more likely than a 2024 first move,” ING’s James Knightley remarked, adding that “there is no reason to believe that ‘substantial further progress’ can’t be reached in Q3 [allowing] for a Q4 taper of the QE purchases… conceivably open[ing] the door to a rate hike before then end of next year.”

The reference to “substantial further progress” is, of course, an allusion to the Fed’s deliberately nebulous forward guidance. Note that the “other” red bar in the figure (below) represents February 25, the day of the disastrous seven-year sale that marked “peak tantrum,” if you will.

For some, the idea of bringing forward Fed hikes is a stretch. Although the data is likely to come in hot and stay that way for several months, the economy remained 8.4 million jobs short of pre-pandemic levels after payrolls.

Note that between the March headline and revisions to January and February, Friday delivered 1.07 million jobs. And yet, the “V” is miles away from being complete (gray shaded area in the figure below).

Crucially, you should note that even when the economy recovers those jobs (assuming it does), the Fed could still claim there’s more work to do. After all, the Fed is now targeting a more inclusive labor market. To speak frankly, there is no chance that the US labor market will be anyone’s idea of egalitarian at any point in the foreseeable future. So, conceivably, the Fed could maintain accommodative policy in virtual perpetuity.

Of course, that doesn’t rule out rate hikes. One or two hikes over four years starting from the lower-bound would hardly count as “aggressive,” so maybe the market is correct to pull forward liftoff.

But some aren’t convinced, among them TD’s Priya Misra. “We enter long five-year Treasurys after a much stronger than expected jobs report sent five-year rates sharply higher as the market pulled forward the first hike to January 2023,” she wrote Friday.

“The bar for the Fed to hike rates remains high,” Misra said, noting the necessity of achieving not just an inflation overshoot, but also the above-mentioned labor market inclusivity, which will almost surely remain elusive. She also noted “the need for the Fed to complete tapering before hiking rates,” on the way to saying that in TD’s view, “the market is overpriced for a risk of an early Fed hike.”

So “give me five” it is. Or at least for one bank, and for a tactical trade.

“With five-year rates reaching 95bps, normalization ambitions are being brought forward even more aggressively,” BMO’s US rates team wrote, in their weekly. Eyes will now turn to the Fed minutes, which BMO said may “offer greater clarity on just how open monetary policymakers are to the idea of an earlier-than-projected liftoff.”

Again, though, the taper discussion has to come first. We have to walk before we run.