10Y US Treasury Yield Rose By 7Bp To 2.79%

Market movers today

In the US the January jobs report is due out , which we expect to show that employment has continued to rise. Focus remains on average hourly earnings growth (we expect 0.2% m/m), as the missing wage pressure despite the tight labour market is still one of the big puzzles. If the growth in average hourly earnings surprises on the upside, it will, in our view, add fuel to the reflation theme in the financial markets.

Italian January CPI inflation is released, which we expect to have dropped to 0.8% due to energy price base effects. Core inflation will likely continue to be depressed by changes to university education fees which is currently distort ing the true picture of underlying inflation pressures in the economy.

Both ECB’s Coeuré and Fed’s Williams (voter, neutral) are speaking today.

In Norway, unemployment figures for January are out.

Selected market news

The Fixed Income market continued to set the agenda in the global financial markets yesterday, 10Y US Treasury yield rose by 7bp to 2.79%, the highest level since March 2014. The market also continued to revise up Fed expectations, and a March Fed hike is now priced by 95% and almost three full hikes are now priced for 2018. Hence, the market is now getting close to our own forecast for the Fed. The whole US curve bear-steepened as the 2Y bond rose only 2bp and the 30Y rose close to 8bp. Hence, the curve-flat tening we have witnessed in the US came to halt at least temporarily, and noteworthy, 30Y US Treasury yields broke the 3.0% line for the first time in eight months. Note that break-evens (inflation expectations) also moved higher, but not to the same degree, and real-yields also moved higher. The US labour market report today could be decisive for whether we will see a continued bear market in the next couple of days.

There were probably no single explanation behind the FI moves yesterday. In respect of key numbers the ISM manufacturing was in fact marginally down to 59.1 from 59.3 though it was stronger than the consensus forecast . But the employment index saw a big drop to 54.2 from 58.1. Momentum and profit -taking on US flattening trades could also be an explanation.

There has also been a lot of focus on the JGB market and speculations that the BoJ would drop the current yield control policy that intend to keep 10Y JGB yields close to zero especially as the JGB buying at recent auctions have been in the low end. However, this morning the BoJ offered for the first time since July last year to buy unlimited amount of bonds from the market. This time at 0.11%. The strong signal from BoJ should help calm the market today.

The higher yields despite being part of a positive reflation story for the US economy weighed on US equity markets and after a positive opening sentiment turned and Nasdaq ended marginally lower, whereas Dow Jones saw a small positive closing. But nothing dramatic and importantly VIX volatility actually fell slightly after the ‘spike’ earlier in the week. The US dollar got little help from the higher US yields and EUR/USD is back above 1.25.