The energy crunch has provided the US$ with a lift in recent weeks. Compared with most other industrialised countries, the US is better protected from the squeeze in natural gas and rising oil prices. The trade-weighted dollar has appreciated to its highest level since early November last year, despite record trade deficits.
Rising Treasury yields reflect investor confidence in the US economic recovery, and the prospect of an early end to bond purchases. Higher short-term interest rates beckon. The 10-year Treasury yield was up another three basis points to 1.61%. The 10-2 year spread widened again to 1.29%. The 10-year break even inflation rate rose again to 2.50%, just four basis points short of the 2021 high (May 12th).
The Treasury market is responding to one undeniable message from the payrolls report: the US is rapidly approaching full employment. The unemployment rate tumbled in September from 5.19% to 4.76%, despite the ‘low’ m/m increase in non-farm employment.
Summary
- US may be through its NAIRU
- Wages are rising, and so are Treasury yields
- All eyes will be on unit labour costs, and productivity
