BPN Feed

Usually the Fed raises rates until they break something. And the flattening yield curve is suggesting it won’t take much to break something -- maybe just a move to 1% and we’ll start seeing breakage.

Investors are penciling in a doubling of the taper pace to $30B along with two hikes for the 2022 dot (while Powell has already essentially abandoned the word “transitory”). All that said, we don’t think an undershoot of the CPI [release tomorrow] should really be considered a major positive. Even a +6.3% headline or +4.5% core, both far below the St consensus for Nov, would hardly warrant an “all clear” declaration from the Fed, especially since inflation is now the single biggest concern among American households (according to a new poll), which makes the topic very much of interest to Congress (since Powell still needs to get confirmed for another term, he can’t sound unsympathetic or dismissive of all the inflation anxiety). If the Nov inflation figures were to overshoot the St consensus, it wouldn’t be shocking to see the 2022 dot reflect three hikes (or close to three) and/or have Powell signal the start of rate liftoff soon after QE concludes (if QE is set to end in March, this would make the May 4 meeting a “live” one).

There are 125 million full-time jobs in America. Of those, right at 50% -- or about 60 million -- report that their current job can be done remotely working from home. We interviewed a representative sample of them . . . When the pandemic wanes and something close to "normal" returns, we conclude that there will be a 37% reduction of in-person days worked per week for those 60 million employees who can work from home. Put another way, a tall office building in a big city where all desk jobs can be done remotely -- on any given week -- will have 37% fewer desks occupied than it did that same week in 2019.

While the tightening process is happening at a very glacial pace, monetary policy globally is at a hawkish inflection point. New Zealand’s central bank is on track to hike rates on 10/5 (Tues night/Wed morning), becoming the second developed market to increase after Norway, while the approaching US jobs report (on Fri 10/8) is very unlikely to be weak enough to forestall Fed tapering (the St is modeling +515K while it would probably take ~150K or worse for the Fed to not proceed w/tapering at its 11/3 meeting (and the FOMC minutes on 10/13 will likely have a hawkish bias to them). Meanwhile, the ECB on 10/28 will outline its tapering agenda and the BOE on 11/4 (one day after the Fed) will likely set the stage for rate hike on either 12/16 or 2/3. Given these catalysts over the coming weeks, it’s hard to be bullish on Treasuries and we suspect yields will additional upside risk (which means tech has further downside risk).