The idea that the Fed may have loosened monetary policy too much last year, and that it might even be forced to raise rates in 2025, was certainly non-consensus. Last Friday’s payrolls report lends support to the view that the Fed should end its cutting cycle here. In fact, after the strong jobs numbers, the Fed’s next move is just as likely to be a rate hike, as it is a rate cut.
Adjusted for the cold weather in January, the Atlanta Fed estimates that non-farm payrolls increased 227k last month. The weather-adjusted average 3-month change for payrolls jumped to 258k as a result. The current pace of hiring is more than enough to put downward pressure on the unemployment rate. If the labour supply increase from immigration drops sharply this year, then the labour market could tighten much more quickly than many expect.
In Japan, the case for a more hawkish BoJ policy continues to build, with strong wage gains, combined with an acceleration in inflation. Last year, it seemed inconceivable that the neutral rate in Japan could be above 1%, let alone 1.5-2.0%. But this view is attracting growing support within the BoJ. Two-year JGB yields have now risen to 0.80% and have further room to rise. The 10-year JGB yield hit 1.32%.
The yield curve in the US is now more accurately priced. However, risks to the upside (higher Treasury yields) remain. For the US Treasury market, rising JGB yields are just as, if not more, important as Trump’s tariffs. It is unlikely that Chinese government bonds will play the anchor role that JGBs occupied for so long.
