US jobs numbers in focus

Last week’s better than expected US jobs report continued to fuel further optimism in the US economic recovery, driving both equity markets and bond yields higher. With the Fed equally focused on its dual mandate, the higher jobs numbers once again put the spotlight on whether inflationary pressures will force the Fed to raise interest rates quicker than expected.

As confidence in the economic recovery continues to grow, earnings expectations and inflationary concerns have also picked up.  While equity investors continue to enjoy the market rally, bond investors are faced with a rising yield environment.

Since the start of the year, the US 10-year Treasury yield climbed over 75 basis points and is currently trading around the 1.7 per cent level. With short-term rates anchored by the Federal Reserve monetary policy and longer term rates rising, the US yield curve has continued to steepen. Implicitly, break-even rates, known as proxies for inflation expectation have also ticked higher and exceeded the 2.2 per cent level. This significant move represents the rapid pace at which the US economic recovery is taking shape.

Even so, despite that inflation expectations are picking up,...