Discussion Razor EA

In today’s note, we update our forecasts for US Treasury yields across the curve
to reflect more broad-based and persistent price pressures and theaccompanying hawkish Fed pivot. We see the benchmark 10y UST yields endingthe year at 2.7%, up from our prior projection of 2.25%. The risks to our forecastare two-sided; a deescalation of the war in Ukraine or more persistent inflationcould mean even higher realized levels, whereas the opposite could result inlower levels.

Our forecast revisions at the front end are larger: our 2y forecasts for YE22 and
nYE23 are 2.9% and 3.15%; while the former is only about 20bp above currentforwards, the latter is roughly 50bp higher, reflecting our higher terminal rateassumption. At longer maturities, we see a more gradual increase, given ourexpectations for strong demand from liability-driven investors—we now expect30y yields to end the year at 2.75%.

One feature of our forecast is a modest inversion of the 2s10s yield curve by
nyear-end. However, we note that the nominal curve tends to invert more easily ina high inflation environment, and we could see earlier and/or deeper curveinversions this cycle. In such an environment, a deeper nominal curve inversionmay be needed to produce the same recession odds in models as seen in morerecent business cycles.

DM trends:
The DM composite flash PMI increased by 1.4pt in March, reflecting an
oexpansion in services (+1.6pt) from further easing of Omicron restrictions.

Country-level trends:
The manufacturing flash PMI increased in the US (+1.2pt), edged up in
oJapan (+0.4pt) and Australia (+0.3pt), but declined in the Euro Area (-1.1pt)and especially in the UK (-2.5pt).
The services flash PMI increased in Japan (+4.5pt) and the US (+2.4pt),
obut edged down in the Euro Area (-0.6pt). Early US business activitysurveys were strong for services, but mixed for manufacturing.

Activity components:
The DM flash forward-looking components decreased sharply for services
o(future activity down by -6.0pt) on concerns over the war in Ukraine.
The composite flash employment PMI increased in the US (+1.4pt)
oconsistent with mostly positive early US employment surveys, ticked up inAustralia (+0.4pt) and in the UK (+0.3pt), and remained roughly unchangedin the Euro Area and Japan.

Inflation-related components:
The manufacturing suppliers’ delivery times component shortened in the
oUS (+3.8pt) and the UK (+2.9pt) but grew much longer in the Euro Area(-5.9pt) on new delays from the Omicron hit in Asia.
DM services input prices surged by +3.2pt and output prices increased by
o+1.5pt, pushing both series to all-time highs for the second consecutivemonth.
Firm expectations of higher wage costs over the next 12 months peaked
oin the February Markit Business Outlook Survey in the US, the Euro Area,and the UK.

Focus next week will be on the employment report for March, as well as on PCE, ISM, and Conference Board consumer confidence.

We expect job gains to remain elevated in March at 550k. Lead indicators for the labor market have picked up as the headwind from the Omicron wave has eased. The unemployment rate is likely to continue to decline to 3.7%, a new post-pandemic low. We expect a rebound in average hourly earnings.

Core PCE inflation likely remained elevated in February, with the YoY reading picking up to 5.5%, a new cycle high.

We expect headline ISM manufacturing to go sideways at 58.5 in March. Global and US growth momentum are falling from a high peak at the start of the year, and near-term risks are skewed to the downside.

We expect consumer confidence to fall for the third consecutive month to 107.0, driven lower by stock market turmoil, rising gasoline prices, and geopolitical tensions.

Conf. Board Consumer Confidence (Mar) Forecast: 107.0
We expect consumer confidence to fall for the third consecutive month to 107.0.
Stock market turmoil, rising gasoline prices, and geopolitical tensions are likely to
send confidence lower. The gap between the UMich and Conference Board
measures of consumer optimism has widened even more in recent months, as
elevated inflation dragged the UMich measure lower while a robust labor market
helped support the Conference Board measure.
The divergence is likely to continue in the near term as rising commodity prices
hit sentiment while the labor market continues to recover with strong wage
growth and historically high job openings.

Personal Income (Feb) Forecast: 0.6% MoM
Personal Spending: 0.3%
Real Personal Spending: -0.3%
PCE Deflator: 0.6% MoM / 6.4% YoY
Core PCE Deflator: 0.4% MoM / 5.5% YoY
Core PCE inflation likely remained elevated in February. We expect the
sequential monthly print to slow modestly to 0.4%, but the YoY reading should
continue to pick up to 5.5%, a new cycle high. Headline inflation will be even
stronger at 0.6% MoM. Both core and headline are likely to peak in YoY terms
soon, but near-term risks are to the upside as commodity strength and renewed
supply chain shocks in Asia put pressure on goods prices.
Income growth should be solid for February, but spending took a step back after
a rapid pickup to start the year. Discretionary services began to recover in
February after some weakness due to the Omicron wave of COVID cases, and
that strength is likely to persist into the spring. Tax refund season is off to a slow
start, which could delay some spending into Q2.

Change in Nonfarm Payrolls (Feb) Forecast: 550k
Change in Private Payrolls: 600k
Unemployment Rate: 3.7%
Average Hourly Earnings: 0.3% MoM / 5.4% YoY
We expect job gains to remain elevated in March at 550k. Lead indicators for
the labor market have picked up as the headwind from the Omicron wave has
eased. PMI employment measures have improved and initial jobless claims have
steadily declined after rising to start the year.
The unemployment rate is likely to continue to decline to 3.7%, a new postpandemic
low. Job openings have leveled off in the past few months, but are
elevated when compared to the number of unemployed job-seekers. The
Conference Board ‘labor differential’ measure confirms that households believe it
is currently easy to find jobs. There is still room for some cyclical recovery in labor
force participation, especially as the pandemic continues to ease, which should
support a larger increase in the employment-population ratio.

Average hourly earnings growth slowed in the February employment report. We
expect a rebound in March, but the pace should be below the run-rate from last
year. Underlying wage growth is elevated, but a number of lead indicators have
levelled off. Meanwhile, average hourly earnings had outperformed alternative
(more reliable) wage indicators, so some relative underperformance is likely.
Overall, the labor market appears likely to continue improving even as full
employment rapidly approaches. We expect continued downward pressure on
the unemployment rate. Wage growth should remain elevated, but another sharp
acceleration is less likely as the tailwinds from fiscal stimulus and pandemicreopening
begin to fade.

It was all about rates on Monday morning in Asia. UST yields surged in a bear flattening move, with 2y yields up 9bps, while US 5s30s inverted for the first time since 2006, according to Bloomberg. Global rates markets were brought along for the ride. Early Asian trading also saw JGB trade at 0.245%, close to the 0.25% threshold of the BoJ. A BoJ bond purchase offer announcement was seen shortly afterwards, with the intervention sending USDJPY soaring. In FX, USD saw a bid, with only AUD in the green in G10. JPY saw the biggest losses, as mentioned earlier, while NOK, CHF and NZD also saw significant losses. NOK was especially affected by a dip in oil prices as Houthi rebels paused hostilities against Saudi Arabia, and concerns over demand rose over China’s covid situation.

Looking ahead, we note that Russia-Ukraine talks are set to continue in Turkey today. NOK and GBP will see Deputy Governor Borsum and Governor Andrew Bailey respectively, with both potentially of significant interest to markets. HKD and MXN will look forward to trade balance data.

USD found a bid in Asian markets today, supported by higher UST yields. G10 currencies were mostly down against the dollar with the exception on AUD. Losses were led by JPY, NOK and CHF, which we elaborate more on below. UST yields surged, continuing the momentum from last Friday. The bear flattening move saw 2y yields lead the move at +9bps, with 30y yields at +5bps. We note that 5s30s have inverted for the first time since 2006, according to Bloomberg.