Update: with the 10Y now at 1.21%, we are entering VaR shock territory:
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It has been a rollercoaster day for bond traders this morning: after yields slid all morning on the continued short squeeze before tumbling to session lows after today's dismal ADP jobs report and even the Treasury's benign refunding statement failing to reverse the slide, yields soared by a whopping 7 bps...
... after a surprisingly hawkish speech from Fed Vice Chair Richard Clarida titled "Outlooks, Outcomes, and Prospects for U.S. Monetary Policy" at the Peterson Institute, suggested the Fed may be much closer to tightening than last week's FOMC implied: to wit, according to the former PIMCO trader, conditions for raising interest rates to be met by end of 2022 if inflation and employment outcomes meet his forecasts, adding that Fed rate hikes in 2023 is entirely consistent with Fed’s framework, to wit:
expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP median of modal projections of 3.8 percent. Given this outlook and so long as inflation expectations remain well anchored at the 2 percent longer-run goal—which, based on the Fed staff's common inflation expectations (CIE) index, I judge at present to be the case and which I project will remain true over the forecast horizon—commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework
A quick breakdown of his speech (courtesy of Newsquawk):
- His forecasts for inflation, employment are similar to the median of Fed policymakers June forecasts
- Expects his assessment for maximum employment outcomes meets forecasts to be reached by end of 2022
- The economy has made progress toward goals since setting a substantial further progress bar for tapering of asset purchases in December 2020
- In coming meetings fed will again assess progress towards our goals and will give advance notice of taper
- Fed policy decisions depend on outcomes, not outlook, which is uncertain
- If core inflation hits 3% this year, as he expects, he would consider it much more than a moderate overshoot of the Fed's goal
Some quotes from his Q&A:
- "If my baseline outlook does materialize, then I could certainly see supporting announcing a reduction in our purchases later this year,” •
- “If the economy does not evolve as expected, then that would obviously impact that”
- "Tapering bond buying and raising interest rates are two separate decisions"
- “We are not thinking about hiking rates. It is certainly not on my, and I don’t think on the committee’s radar screen”
- “I have been surprised certainly by the magnitude of the decline in bond yields”
- “It has been a move in real yields and it’s been a global move in real yields and the move is quite pronounced”
And last but not least, He sees upside risks to his inflation forecasts.
- Some more observations from Newsquawk, explaining the violent market reversal, and which observe that Clarida has taken a lean on the more hawkish side in his first post-FOMC remarks, suggesting he would be willing for a 2022 hike if targets are met.
- To taper in December 2021 is slightly less "dovish" than Bullard/Waller who have indicated willingness from October.
- Participants weigh Clarida's comments much more than regional Fed Presidents, so it is telling that such an influential member is eager to begin the pathway for rate hikes
- Clarida also is much more attuned to runaway inflation risks, unlike some of the other core Fed members
His full speech is here.