After several good pieces of news for the US jobs market and strong manufacturing data this week, some have suggested that a tightening of policy by the Fed could be on the cards.
Kit Juckes, Societe Generale, gives his view:
Manufacturing PMI data brought a little relief in China, a bit of stability in the Euro Zone, some good news in the UK, and the possibility that the US is indeed seeing a re-acceleration of growth. US GDP data painted a picture of an economy putting fiscal headwinds behind it, and being in good shape for growth to pick up speed.
A single manufacturing PMI is not definitive but it is consistent with the idea that things are looking up and that is the backdrop to a labour market report where the consensus looks for an increase in employment of ‘around 200k’. That pace of job creation (above 1.5% per annum) is, enough to maintain the downward trend in unemployment.
The Fed’s policy response to falling unemployment and low inflation is firstly to slow bond purchases, secondly to do nothing. The Fed’s obsession with deflation risks will stay their hand for a long time, which probably means less (or no) tightening pre-2016 and more, faster, thereafter. It feels like I want to pay 2yr US rates 2 or even 3-years forwards to catch the prospective kink in the rate path. Markets though, have a knack of looking forwards and pricing things in long before they happen.