By Cormac Mullen, Bloomberg Markets Live Commentator and reporter
The reaction to the Fed’s taper announcement suggested a cautious optimism from strategists that the coming months will see moderate advances for yields, the dollar and equities. That may be premature.
U.S. stocks closed at records, Treasuries retreated and the yield curve saw a modest steepening -- reversing some of its recent flattening move.
But there are two plausible reasons to expect a flattening curve to reassert itself.
- The first is a ramping up of policy error bets, which still seems likely given the fact that traders see sooner and faster rate hikes than the Fed suggests. That’s the theory that policy makers will be forced to speed up the hiking cycle thanks to sustained inflation, which in turn will hurt the recovery.
- The second is the chance of a natural slowdown, led by weakness in the Chinese economy and exacerbated by an easing in the supply chain crisis and a realization that it resulted in over-ordering and an inventory glut. Both would lead to flatter curves.
The wild card for rate hike bets of course is whether Fed Chair Jerome Powell will still be in place next year, something President Joe Biden has promised to decide upon soon. Friday’s labor market numbers have become the next key catalyst for rates traders, but perhaps the most important upcoming jobs data is Powell’s own.