Thanks to the barrage of rather horrible employment data we’ve been hit with recently, Deutsche Bank is pushing back their forecast for a Federal Reserve interest rate hike from November 2010 to all the way out as far as potentially March 2011 (Q1 2011)
Deutsche Bank’s Joseph LaVorgna:
A Grinding labour Market Recovery: The June employment report confirmed our view that the labour recovery is progressing, but the pace continues to be stubbornly anemic. Monetary policymakers’ concerns of another “jobless recovery” will hardly be diminished by the latest results. While there is one more jobs report ahead of the August 10 FOMC meeting, there is little reason to believe the extended period language will change anytime soon. As we highlight in the following section, we are pushing our forecast for the first Fed rate hike into next year.
Lower than expected core inflation, an uneven labour recovery and concerns about sovereign risks have given us cause to change our forecast for monetary policy tightening from November 2010 to Q1 2011. For the Fed to commence removing extreme policy accommodation, sovereign risks need to abate and more importantly, the labour market needs to show more robust gains in private payrolls. If the labour market does not improve significantly in the near term, then monetary policy will be on hold much longer than we currently envision [Emphasis added] and downside risks to our forecast would rise commensurately.
Which means that U.S. 10-year government bonds could rally even further despite yields already being extremely low, historically, at about 2.98%.
Bullish Yields Through to a Policy Shift: We remain bullish on bonds. Any setbacks will be short-lived and shallow and should be used as buying opportunities, and 10s could trade to around 21⁄2 per cent. [Emphasis added]
A 2.5% yield would imply a rather strong Treasury rally ahead (Note that bond yields fall as bond prices rise). We’re not touching the bonds, happier to be wrong here than to end up feeling plain silly lending to the government for 10-years at just 2.98%.
(Via Deutsche Bank, Quarterly Update: labour Market is Key to Outlook, Joseph LaVorgna, 2 July 2010)