MACRO COMPASS

The Market’s Focal Point is Changing

MACRO COMPASS

The Market’s Focal Point is Changing

The Big Idea

Markets spent most of the past year debating how high the Federal Reserve would take interest rates. Increasingly, however, investors are asking a different question:

What is driving higher long-term Treasury yields?

Higher yields driven by tighter Fed policy have historically supported the US Dollar. Higher yields driven by rising term premia, heavy Treasury issuance and growing demand for capital are a different proposition. Last week’s unusual bear-steepening following the FOMC meeting suggests the market may be beginning to make that distinction.

This week, the focus shifts to the US labour market. Payrolls, JOLTS, ADP and ISM surveys will determine whether US exceptionalism remains intact or whether investors begin questioning the next phase of the Dollar cycle.