Bond-Market Inflation Skeptics See Little to Fear in Coming Data

(Bloomberg) -- The fastest U.S. wage growth in a decade has sharpened bond investors’ focus on the potential for inflation to stage a comeback and spur the Federal Reserve to action. But traders aren’t holding their breath.

This week’s data are a bonanza for inflation enthusiasts, starting with an update on consumer prices Tuesday, followed by producer prices and inflation expectations. Some investors have added to wagers that price pressures will strengthen, with the Fed signaling it’s paused and wants to see higher inflation to justify tighter policy. Chairman Jerome Powell reiterated the Fed’s mantra on being patient in a speech Friday night.

Climbing wages may encourage further inflation bets: Friday’s payrolls report disappointed in terms of job gains, but it also showed the fastest increase in average hourly earnings since 2009. However, Stephen Bartolini at T. Rowe Price doesn’t see that boosting consumer prices, as slowing growth may discourage companies from raising prices to defray higher labor costs. That’s part of the reason he’s staying long Treasuries.

Bond-Market Inflation Skeptics See Little to Fear in Coming Data

“At this point in the cycle, a pickup in inflation will generally lead to corporate margin compression, which is potentially more supportive of maintaining a long duration stance,” Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures. He sees annual CPI remaining around this report’s consensus of 1.6 percent -- the slowest since 2016 -- for a while.

Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two months. In the interest-rate options market, traders have been ramping up positions that target lower yields in five- and 10-year notes.

Early Dismissal

As for the policy outlook, traders have all but dismissed the prospect of a Fed hike this year, and are starting to factor in the chance of easing. Bartolini shares the market’s view that the central bank’s next move will be a cut, and has research to back his case.

“History would tell us that a Fed pause leads to rate cuts,” he said. “We really could only identify one time since the ’70s that the Fed paused and resumed hiking, and that was in 2015-16.”

By contrast, rates analysts at TD Securities are still looking for a hike this year, possibly in September.

For TD’s Priya Misra, head of global rates strategy, it’s too soon to call a turn in the labor market. The weaker jobs data were likely a result of bad weather impacting the construction sector, she said.

Yet confidence in U.S. growth could falter if Monday’s retail sales data confirm the weakness in December, when they fell the most in nine years.

“The last retail sales report was horrendous, one that really spooked the market,” Misra said, and another low reading could reinforce concern that wages aren’t growing enough to buoy consumption.

What to Watch

  • The main event of the week may come Sunday night, with CBS’s “60 Minutes’’ program featuring an interview with Powell. Key indicators will include retail sales and CPI.
  • Here’s the calendar for economic releases:
    • March 11: Retail sales; business inventories
    • March 12: NFIB small-business index; CPI
    • March 13: Mortgage applications; PPI; durable goods orders; construction spending
    • March 14: Jobless claims; import/export price index; Bloomberg consumer comfort; new-home sales
    • March 15: Empire manufacturing; industrial production; JOLTS job openings; University of Michigan consumer sentiment; Treasury International Capital flows
  • Fedspeak tapers off ahead of the March 19-20 meeting:
    • March 10: Powell on ‘60 Minutes’
    • March 11: Powell gives remarks at conference in Washington
    • March 12: Fed’s Lael Brainard at community reinvestment conference
  • Investors face a full calendar of auctions, including $78 billion of notes and bonds
    • March 11: 3- and 6-month bills; $38 billion of 3-year notes
    • March 12: $24 billion 10-year note reopening
    • March 13: $16 billion 30-year bond reopening
    • March 14: 4- and 8-week bills

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