USD Swaps: NFP rattles but markets are on the mends; Bond rally premature?

Chart lines Oct 2022
This morning’s strong NFP release initially rattled USTs and equities but both are now well-off earlier lows. SG sees UST rally as premature.

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  • NFP rattles but markets are on the mends

  • SocGen: Yields peak but is bond rally premature? 


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    NFP rattles but markets are on the mends; Bond rally premature?

    This morning’s November non-farm payrolls print definitely upset the apple cart by injecting a dose of reality into a potentially overly dovish/bullish marketplace.  To be sure, the jobs report came in hotter than expected on various metrics, calling the markets’ distinctly dovish view on Fed Chair Powell’s comments this week.


    Looking at the numbers, headline non-farm payrolls came in at a higher-than-expected +263k last month (versus +200k Bloomberg consensus) after an upwardly revised +284k gain in October.  Meanwhile, average hourly earnings came in at +0.6% MoM or twice as much as 0.3% forecast – and this came after an upward revision to the prior month.   In all, not the best data series for the Fed’s fight against inflation as “it’s not slowing down quickly whatsoever,” one source quipped. 


    Accordingly, markets were quickly jarred by the data with the major domestic equity indices opening sharply lower while Treasury yields ricocheted sharply higher in a front-end-led move.  However, with the dust starting to settle in the early afternoon trade, equities are well off their morning lows (Dow -0.35%, S&P -0.67%, Nasdaq -0.94%) while Treasuries have also done a decent job recouping some early losses as "the more pronounced trend of the week gained momentum," one source explained.  The benchmark 10y note yield is last 4.5bps higher at 3.55% after hitting a high-water mark of 3.6325% earlier while the 2s10s spread 3.25bps narrower at -76bps after hitting a trough of -78.5bps immediately after the payrolls data hit the tape.


    In the Eurodollar trading pits, red and greens are also off their earlier lows with losses currently contained to just 1 to 9 ticks.   Meanwhile, swap spreads are mixed with the spread curve steepening against the bear flattening in underlying rates with SOFR volumes running at an above-average clip, best seen at the 10y & 30y points.  In the backdrop, IG issuance has dried up for the week after roughly $22bn priced earlier in the week surpassing early estimates if $15 to $20bn owing largely to Amazon’s $8.25bn 5-part deal that priced on Tuesday.


    Currently, SOFR spreads – 2s 3bps (-1bps), 3s -15.625bps (-0.125bps), 5s -25.375bps (-0.25bps), 7s -34.375bps (-0.5bps), 10s -32bps (+1bps), 20s -65.625bps (+1.625bps), 30s -68bps (+2.5bps). 



    SocGen: Yields peak but is bond rally premature?

    Barring today’s NFP-induced hiccup in yields, the rally in bonds began in late October, gained momentum after the October CPI print in mid-November and gathered steam again this week with below-consensus inflation prints in Germany and Spain, as well as somewhat dovish comments on inflation from Chair Powell, even as he emphasized the need for “substantially more evidence” of inflation declining.


    With the rates market at this juncture, strategists at SocGen have pondered whether or not we’ve already seen the peak in bond yields.  Well, in the bank’s view, “the current economic environment and our Fed policy outlook for the coming years suggest that yields most likely peaked in 4Q22.”  And looking ahead, SocGen believes that “Treasury yields should gradually decline in 2023 as the economy starts to weaken, ending the year at 3.25%” and it expect “the yield curve to remain inverted in 1H23 but start to steepen in 2H as we get closer to a recession in early 2024.”


    Nevertheless, SocGen believes that “the rally in bonds seems to contradict the recent strength in the data. , strong retail sales, a rebound in GDP growth in 2H and resilient consumer activity are at odds with the recessionary risks suggested by the inverted yield curve.” Although the Fed is looking to downshift, the bank expects “the median dot to show a slightly higher terminal fed funds rate in the December summary of Economic Projections (SEP).”  Thus, SocGen believes that “with at least an additional 75-100bp in rate hikes from the Fed, the rally in bonds seems a bit premature.”