Last night’s price action spoke to the virtues of sleeping deeply and turning off your phone. First, better than expected data drove yields higher (US 10yrs tipped 2.7%) and then the Fed downgraded their growth assessment and sounded more worried about low inflation, and yields came back down.
So which is more important? The data, or the change in Fed language?
I am tipping the data. The Fed is still looking toward the exit, and their next move remains a tightening of policy. In this environment it is hard to fall in love with duration / out of love with the USD.
Still, it seems to me that Sep-taper had become very consensus. It is clearly up to the data to deliver.
That basically means that it is up to payrolls to prove the apparent weakness in GDP wrong. That is very possible. Many researchers think that real GDI is a better measure than real GDP, and this has picked up to a 3% pace over the last year (GDP remains stuck at around a 1.5% pace).
If real GDI is right, there is less tension between the falling unemployment rate and labour market data – and therefore less reason to expect that the labour market will soften up. That ought to be enough to keep Fed tapering on track for September.
