Market expectations are gearing towards US labour market resilience despite the Middle East conflict. For this Friday, consensus expects NFP of 65k and an unchanged unemployment rate of 4.3%. Thus far, high frequency data including jobless claims (initial and continuous) are tracking better than the same period last year. Moreover, job openings (JOLTS and Indeed) have stabilized and are modestly grinding higher. It could well be that the US is relatively insulated against gyrations in the energy space. However, we also wonder if the AI-related pessimism on hiring could be behind us. Notably. Job vacancies in the software development segment appear to have bottomed out. Against this backdrop, a firm set of labour market data looks likely (we would put a lot less weight on NFP data given its inherent volatility).
Investors will likely ponder overheating risks – limited hit to GDP growth while inflation stays high due to elevated energy prices (still no breakthrough in US-Iran talks and the current ceasefire looks threatened) and heavy capex needs from the AI-boom. The entire US yield curve is likely to be buoyant, and we continue to lean towards steepening. To be sure, the case for steepening has weakened somewhat as Fed easing is no longer base case. However, we think that aggressive Fed hikes are off the table and this could cap frontend yields somewhat. However, there is no such cap on the backend. Yields should already be buoyant from firm sentiment and rising inflation expectations.
We should also keep an eye on the Treasury Quarterly Refunding this week. The US Treasury indicated last night that it would borrow USD189bn in 2Q, USD79bn more than previously estimated. There is a reasonable chance that the language could be tweaked in Wednesday’s announcement to prepare market participants for an increase in coupon bearing issuances in the coming quarters, especially given that tariff refunds will start to kick in. Some steepening pressures are likely.
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