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US: Increase in yields, inflation and monetary tightening expectations

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While the headline figure is weak regarding the US labor market, the underlying details suggest that it is not. For the Fed, the unemployment rate of 3.9% in December is positive enough to ignore the headline numerical weakness. Wage increases continue to be strong and stand out as an important detail that can be associated with the inflation outlook in the near term. The concept of inflation is related to supply for the broad term and both supply and demand for the near term. Therefore, the double interaction in the wage-inflation concept should be monitored for marginal effects. Acceleration in wage increases will be necessary in order to fill job positions in order to meet the demand in the economy in a period of increasing resignations, and the demand for high wage increases due to the high inflation will cause this effect to remain strong. December CPI will be very critical this week and market consensus points to an annual inflation of 7%.

 

The bond market expects the Fed to be more hawkish during the tightening process. The movement in 10-year bond yields is at the level of 1.77% and we are watching the highest yields in 2 years. This move is important for the US-German spread. We shared that the US yields will be priced to reflect the inflation expectation, and the bond market is currently moving in that direction. Above the critical 1.70-75% range that we have pointed out, we expect the trend towards the theoretical 2-2.50% band to accelerate if the market makes March rate hike pricing more intense, especially after the CPI. A rate hike in March would mean more serious tightening; This means that the Fed will both increase the possibility of 4 interest rate hikes instead of 3, and realize the rapid reduction of the balance sheet. An asset size above 2015 levels still technically indicates that the Central Bank is supportive, so it can be expected that the Fed will move faster for financial tightening.

 

Inflation, which reached 5% in the Euro Zone, also points to challenging conditions for the Central Bank. Therefore, the movement in bond yields is currently expansionist and upward trending. Therefore, we look at similar factors for financial tightening for the ECB.

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