Overnight, the US Treasuries curve bear steepened as market participants digest firm US data. JOLT job openings rose by 8098k (against consensus of 7740k) while ISM services (and its subcomponents) beat across the board. In particular, the spike in prices paid to 64.4 (against consensus of 57.5) was eye catching and could well be a response from suppliers in anticipation of further tariffs from the Trump administration. NFP (due 10 January) is the next key data point to watch and a print in the 150-200k range would probably not shift rate pricing significantly. From our perspective, we note initial jobless claims and continuous claims have both been generally low and there have been no signs that imminent weakness may be in the offing. Risks to the NFP print tilt slightly to the upside. Against this backdrop, the Fed will be in no rush to cut rates. Our version of the Taylor model indicates that the FFR is about neutral given where US inflation and unemployment rate are currently at.
Current levels of US Treasury yields (indicate significant worries on duration and are now consistent with expectations of a strong US economy. We think that upside to short-term US yields may be limited (4.4-4.5% for the 2Y). The Fed still has an easing bias even if firm data would likely prompt a much slower pace of easing. Even if this changes and inflation rebounds, the more likely scenario would be an extended pause from the Fed. Rate hikes do not look plausible at this point. Meanwhile, the selloff in 10Y USTs look stretched, albeit there are no signs of capitulation yet. Having climbed by 53bps since the low in December to 4.68% currently, Immediate resistance is around 4.70% (the peak seen in 2024). At these levels, we think USTs would probably serve as a risk off hedge in case sentiment gets dicey in the coming weeks. Note that US equities are starting to get impacted from rising US yields.
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