It will take a major slowdown in hiring to slow wage growth from the current 5-6% down to the 3.5% needed to reduce overall inflation to 2%. Such a reduction will probably only happen if unemployment rates increases to about 4.5%. With more than 10 million available jobs, this could take a while.
The Fed has been very clear that fighting inflation is the only concern at the moment. Raising rates into restrictive territory and keeping them there for a while is the prescribed medicine. The market however, is dead set on the notion that the central bank will blink and start cutting rates once the slowdown really starts to bite. While the central bank was clearly wrong assuming high inflation was transitory, the market has so far been very wrong in assuming a Fed pivot. We do not believe we have seen the peak in rates yet.
Another factor that will keep upward pressure on rates, is the huge increase in net government bond supply needed to be absorbed by investors as the FED turns net seller.
The burden on domestic US private investors will increase massively. The effects are already clearly visible on US Treasury issuance days. Since August 1st, 10Y treasury rates have increased 5.2bps on average on days with fixed coupon Treasury auctions vs 1.9bp for days without government borrowing. The coming week brings both a 10Y and a 30Y auction.
- Nordea
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