And Miles To Go Before We Hike

In a parallel universe where the latest US jobs report showed the world’s largest economy added a million or more positions last month, the market narrative this week would probably revolve around the notion that inflation and retail sales data has the potential to instill a sense of urgency in the Fed.

Instead, market participants have leeway to contextualize this week’s top-tier US data by reference to disappointing payrolls, which is arguably a good thing, to the extent any upside surprises might have otherwise compelled traders to reprice the Fed (i.e., bring forward the first rate hike and recalibrate expectations for taper timing).

Of course, I’m looking at things through the lens of equities and risk assets in general, which, as Deutsche Bank’s Aleksandar Kocic put it in his latest, “are likely to be displeased with higher rates.”

We all know stocks are stretched on most traditional valuation metrics. Credit is similarly priced to perfection. For example, IG spreads compressed to 87bps Friday, the lowest in three years (figure below).

Inflows have been robust. Lipper’s data showed another $3.85 billion found its way into IG credit funds in the latest weekly reporting period. Notably, IG is looking to bounce back. April’s returns were solid, a welcome reprieve after a rough Q1, when blue-chip US credit was swept up in the bond mini-tantrum along with other duration-sensitive assets.

And that gets us right back to the data. You could argue that US rates should be less sensitive to CPI and retail sales this week in the wake of the jobs miss. April’s NFP “shocker” will likely serve as a convenient prop for any and all “we still have a long way to go” narratives emanating from policymakers.

“Concerns about inflationary pressures pushing the Fed’s hand sooner than anticipated should abate in light of the latest labor market data indicating significantly less progress toward pre-pandemic trends,” Bloomberg Economics said. Throw in the base effects disclaimer and you’re left with a solid rationale for ignoring the inflation prints.

“While we continue to expect higher yields, the repricing may take a little longer to achieve, with individual data surprises less informative when the wide range of forecasts is taken into account,” Goldman’s Praveen Korapaty remarked.

“Diminished sensitivity in a period with the high level of forecast dispersion/uncertainty likely means it will take an accumulation of positive surprises for data to push yields materially higher,” Korapaty went on to say, following payrolls.

Retail sales may be harder to look past, but a deceleration from March’s stimulus-fueled shopping spree is guaranteed, so even a beat will look tame by comparison. Obviously, a huge upside surprise could perhaps move the needle, but, again, references to the jobs report will be pervasive.

Just in case the “patience” message needs to be reinforced, a bevy of Fed speakers are on deck, including Willians, Brainard, Daly, Harker, Clarida, Waller, Bullard and Kaplan.

“The one certainty in the week ahead is that the Treasury Department will be providing ample supply in the form of the May refunding auctions,” BMO’s Ian Lyngen said. “Perhaps the upcoming issuance has tempered the extent to which investors can rationalize lower yields for the time being,” he added. “Not a concession in the traditional sense, but nonetheless a background factor if nothing else.”

“[The jobs] report should push out the timing of the Fed exit, at the margin [and] we maintain our 5s30s steepener trade,” TD wrote. “The market had been anxious about QE tapering coming earlier due to strong data [but] this report should allay some concerns.”

Arguably, that’s all that matters for equities as long as the data doesn’t roll over in earnest.