Macro/government bonds
The publication of weaker than expected US labour market data was the major catalyst for lower yields last week. This triggered a rally in fixed income markets, which was most pronounced at the front end of the US Treasury curve. Illustrating this, the yield on the US 2-year fell by 24 bps and the yield on the US 10-year fell by 17 bps.
There was muted reaction to the outcome of the Fed July meeting, which left interest rates on hold at 4.5%. Fed chair Jay Powell painted a picture of a solid labour market and made the point that the US economy has not been held back by current monetary policy.
Friday saw the publication of the Non Farm Payrolls report. Net job creation came in at 73K, lower than the market had been expecting. There was also a significant downwards revision to the numbers for May and June, which were reduced by 258K. President Trump called the numbers ‘phoney’ and subsequently fired the chief labour market statistician at the Bureau of Labour Statistics, Erika McEntarfer. The market responded to the weaker labour market data by pricing in the greater probability of a rate cut in September.
Trump also called on Powell to resign again, while Fed governor, Adriana Kugler announced her resignation. Trump will now appoint a new head of the BLS, a new governor to the Fed, and a new Fed chair when Powell’s tenure ends next May. With any successful candidate likely to be more attentive to the Administration’s policy demands, it has increased concern within the market about the growing politicisation of US monetary policy.
The Bank of Japan left interest rates unchanged at 0.5%. It marked up its inflation outlook for 2025 from 2.2% to 2.7%, keeping the prospect of tighter monetary policy on the table for now. Price action in the US set the tone for bond markets globally, with yields declining in UK, Eurozone, and Japanese bond markets.
We remain constructive on duration and yield curve steepening strategies.
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