U.S. Rate Hikes to Start in March
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
US Fed’s tightening justified by January jobs data; rate hikes to start in March
Investor sentiment remains weak for bond markets. The 3Y KTB yield neared 2.2% levels again, while the 10Y KTB yield exceeded 2.6%. We attribute this to growing fears of global monetary tightening, with: 1) the Bank of England raising interest rates consecutively; and 2) the ECB expressing concerns over high inflation. The US January jobs report turned out better than expected, lending support to the Fed’s efforts to tighten its monetary policy. The 10Y US Treasury yield has surpassed 1.9% to reach the highest level since the end of 2019.
The latest US jobs data reaffirmed a solid recovery in the labor market. In January, the civilian noninstitutional population increased by 1,066,000 MoM and the civilian labor force grew by 1,393,000 MoM. The labor force participation rate reached 62.2%, the highest level since April 2020, with people starting to return to the labor market. However, we believe the labor market is still short of supply, as indicated by the limited rise in the unemployment rate.
In January, average hourly earnings climbed 5.7% YoY to reach the highest level since June 2020. Those of private sector production and nonsupervisory employees also rose 6.9% YoY. Wage growth is unlikely to slow down in the near term given continuing shortage in labor supply. Investors now need to be cautious of an increase in underlying inflation. The US 5Y5Y inflation swap rate has remained above 2.4% levels. We thus forecast the US Fed to start raising rates from March to ease heightened long-term inflation expectations.