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Oil prices breaking above $100 fuel expectations of rate hikes! Will the Fed act next week?
高腾国际
joined discussion · Jun 8 14:41

Gaozhan Weekly Rates Analysis | NFP, Oil Prices, and Hawkish Sentiment Converge—Is the Market Pricing in a Loss of Policy Credibility?

Issue #202612 In last week’s column, we analyzed the impact of oil price shocksInterest rate hikeand the resulting rise in rate hike expectations. This week, we further explorehow stronger-than-expected nonfarm payrollsare driving a shift in market expectations. Last week, the newly released MayNon-farmNew addition172,000farExceeding expectations. Traders have moved forward expectations forInterest rate hiketo an earlier date, with yieldsJanuary next year。 $Brent Last Day Financial Futures (DEC6) (BZmain.US)$ reaching as high as$99，US Treasury bondsThe yield curve has steepened across all maturities. This setup reflectslabor marketresilience, energy shocks, and the inauguration of a new Fed chair. This article will systematically analyzeemploymentdata, officials’ policy stance, and yield curve pricing implications across three dimensions.Interest rate hikeThe underlying logic behind the expected rate hike. ▌FedWatch Data Quick View CME FedWatch datashows that there are stillFOMCremaining until the next9 days. Maintain interest rates3.50%-3.75%unchanged in the Fed’s next rate decision is97.9%. Compared to a week ago,99.6%marginal pullback.The stronger-than-expected non-farm payroll dataand elevated oil prices are the key drivers behind the shift in expectations. ▌ Stronger-than-expected non-farm payrolls: The turning point for rate hike expectations MayNon-farmNew addition172,000,, significantly above the equilibrium level. The prior two months were collectively revised upward by93,000. Hourly earnings rose month-over-month to0.3%, with the unemployment rate remaining at4.3%。Huatai Securitiespointed outNon-farmSignificantlyExceeding expectationsboosting the necessity for the Fed toInterest rate hikeTraders immediately movedInterest rate hikeexpectations from March next year forward toJanuary。 ▌ Bear Steepening in U.S. Treasury Curve: The Pricing Language of Rate Hike Expectations Last week, the yield curve exhibited a classicbear...
Issue #202612
In our previous column, we analyzed the intensifying expectations amid oil price shocks.Interest rate hikeThis issue further exploreshow stronger-than-expected nonfarm payrollsare driving a shift in market expectations.
Last week, the freshly released MayNon-farmNew additionnonfarm payroll figure came in at 172,000,significantlyExceeding expectations. Traders have moved forward theirInterest rate hikerate cut expectations toJanuary next year。 $Brent Last Day Financial Futures (DEC6) (BZmain.US)$ Reached a high of$99，US Treasury bondsThe yield curve has steepened across all maturities. This setup reflectslabor marketthe combined effects of labor market resilience, energy price shocks, and the new Fed chair's inauguration.
This article will systematically analyzelabor marketdata, officials’ policy stance, and yield curve pricing implications across three dimensions to unpackInterest rate hikethe underlying logic behind the rising rate hike expectations.
▌FedWatch Data Quick View
CME FedWatch dataindicates that the nextFOMCStill remaining9 days. Maintain interest rates3.50%-3.75%unchanged in the Fed’s next rate decision is97.9%. Compared to a week ago,99.6%marginal pullback.The non-farm payroll data beat expectationsand elevated oil prices are the key drivers behind the shift in expectations.
▌ Non-farm payroll beats expectations: A turning point for rate hike expectations
MayNon-farmNew addition172,000, significantly above the equilibrium level. The prior two months were collectively revised upward by93,000. Hourly earnings rose month-over-month to0.3%, with the unemployment rate remaining unchanged4.3%。Huatai Securitiespointed outNon-farmSignificantlyExceeding expectationsboosting expectations for the Fed to raise rates within the yearInterest rate hikethe necessity. Traders immediately movedInterest rate hikeexpectations forward from March next year toJanuary。
▌ Bear Steepening in U.S. Treasury Curve: The Pricing Language of Rate Hike Expectations
Last week, the yield curve exhibited a classicbear steepeningpattern: $U.S. 3-Year Treasury Notes Yield (US3Y.BD)$ Rise3.49%to4.194%， $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ rose only0.42%up to 4.994%.
the short endrose far more thanthe long end, reflecting fundamentally different pricing logic.The short endis pricing in near-termInterest rate hikerisk—a stronger-than-expected nonfarm payroll reportcombined with elevated oil prices, is prompting the market to revise up near-term policy rate expectations.long endis caught between stagflation concerns and inflows of safe-haven funds, limiting its upside.
Historical experience shows thatInterest rate hikeat the initial stage of policy easing, the yield curve typically firststeepens bearishly。short endis more sensitive to policy expectations and reacts faster than thelong end。
Currently,3s30s spreadhas already narrowed since the beginning of the month70 basis pointswidened to80 basis points. If subsequentlyinflationandemploymentdata continues to come in above expectations, there remains room for further steepening of the curve. This suggests that market confidence in the Fed’s commitment to price stability is eroding.
▌ Divergence within the Fed: Hawkish voices intensify
Hawkish：Dallas Fed President LoganandCleveland Fed President MesterAll warnedInflationResilienceExceeding expectations，Interest rate hikeOptions are back on the radar. The new chairKevin WarshIn their first internal memo, pledged a comprehensive review of the policy framework, which the market interprets as a potential shift in tone.
Dovish：White House economic advisor Hassettbelieves there is stillinterest rate cutroom. However, compared toHawkishthe volume of voices, its influence is clearly weaker.
Centrists: Most officials maintained a data-dependent stance, awaiting more economic signals. Currently, the JulyInterest rate hikeprobability has risen to8.4%。
▌ Historical Perspective: Policy Implications of a Stronger-than-Expected Nonfarm Payrolls Report
Year 2023Non-farmsustainedExceeding expectationsIt previously forced the Fed to keep rates higher for longer. The current situation differs due to the added energy supply shock, making policy trade-offs more complex.
▌ Scenario Analysis
*Scenario 1 (Persistent Inflation)
High oil prices combined withoverheated labor marketcould prompt the Fed to restartInterest rate hikerate hikes, strengthening the US dollar,Goldand pressuring equities.
*Scenario 2 (Geopolitical Tensions Ease)
Driven by the pullback in oil prices,inflationexpectations have eased, the Fed remains on hold, and risk assets are rebounding.
Current pricing leans toward Scenario Two, butNon-farmdata suggests risks for Scenario One are accelerating.
▌ Other major central bank activities
European Central Bank: May CPI exceeded 3%, rising to3.2%, coreinflationrose to2.5%, with services-sectorinflation at 3.5%. Traders have fully priced in JuneInterest rate hike25 basis points.
Bank of Japan: Reports suggest the June meeting will considerInterest rate hike25 basis points, with another possible move within the year.Interest rate hikeReal wages have risen for four consecutive months, markingInterest rate hikeby providing support.
People's Bank of China: Last week's reverse repo operations dropped to zero. Additionally, a 500 billion yuan three-month outright reverse repo was conducted.
▌ Market Reaction: Repricing of Rate Hike Expectations
Markets experienced significant volatility last week. $USD (USDindex.FX)$ Breakthroughthe 100 level, up1.13%to100.07。 $Crude Oil Futures (SEP6) (CLmain.US)$Increase2.84%to$90.25， $Brent Last Day Financial Futures (DEC6) (BZmain.US)$ hit $99 and closed at $92.87。 $Gold Futures (AUG6) (GCmain.US)$ Sharp decline4.73%to$4,353.90, with a stronger dollar andInterest rate hike expectations creating dual downward pressure.
▌ Closing Remarks
The core conflict this time lies inThe non-farm payroll data came in above expectations combined with elevated oil prices,Interest rate hikeExpected to escalate from a peripheral topic to the main focus. The market is shifting from"whether a rate hike is possible"Shift in directionto "when the rate hike will occur". Investors should closely monitorthe FOMC meeting on June 18—Kevin Warshthe signals sent from the first meeting chaired by the new Fed chair.
Issue #202612 In last week’s column, we analyzed the impact of oil price shocksInterest rate hikeand the resulting rise in rate hike expectations. This week, we further explorehow stronger-than-expected nonfarm payrollsare driving a shift in market expectations. Last week, the newly released MayNon-farmNew addition172,000farExceeding expectations. Traders have moved forward expectations forInterest rate hiketo an earlier date, with yieldsJanuary next year。 $Brent Last Day Financial Futures (DEC6) (BZmain.US)$ reaching as high as$99，US Treasury bondsThe yield curve has steepened across all maturities. This setup reflectslabor marketresilience, energy shocks, and the inauguration of a new Fed chair. This article will systematically analyzeemploymentdata, officials’ policy stance, and yield curve pricing implications across three dimensions.Interest rate hikeThe underlying logic behind the expected rate hike. ▌FedWatch Data Quick View CME FedWatch datashows that there are stillFOMCremaining until the next9 days. Maintain interest rates3.50%-3.75%unchanged in the Fed’s next rate decision is97.9%. Compared to a week ago,99.6%marginal pullback.The stronger-than-expected non-farm payroll dataand elevated oil prices are the key drivers behind the shift in expectations. ▌ Stronger-than-expected non-farm payrolls: The turning point for rate hike expectations MayNon-farmNew addition172,000,, significantly above the equilibrium level. The prior two months were collectively revised upward by93,000. Hourly earnings rose month-over-month to0.3%, with the unemployment rate remaining at4.3%。Huatai Securitiespointed outNon-farmSignificantlyExceeding expectationsboosting the necessity for the Fed toInterest rate hikeTraders immediately movedInterest rate hikeexpectations from March next year forward toJanuary。 ▌ Bear Steepening in U.S. Treasury Curve: The Pricing Language of Rate Hike Expectations Last week, the yield curve exhibited a classicbear...
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Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
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