January may have ended on a positive note, and the early morning hours of February may have held similar promise, but as the new trading month begins, bonds are increasingly selling off. Comments from Fed’s Harker are not helping. Higher inflation implications in the ISM Manufacturing data are compounding the issue.
Here’s the bounce is ISM’s “prices paid” component (not too troubling, but a reversal of last month’s drop):
The headline ISM Index tells a bit of a different story–one in which the post covid economic boom is still coming off the highs, but also still in strong territory.
As for Harker’s comments, let’s put them in context so we can understand how much they actually matter in the bigger picture. The next 3 charts show Fed Funds Futures for April 2022. This is basically the rate hike outlook for the March 2022 meeting. There was certainly a reaction, but it didn’t last.
More importantly, it wasn’t very big in the bigger picture.
If zooming out changes the takeaway this much, what happens if we zoom out even more? We can still see the January 26th Fed day, but in this context, it’s just a sharper than normal short-term move that still fits with the longer-term shift in rate expectations. This is a good chart to visualize the progressive migration–the “repricing”–that occurs among traders as they methodically account for an adjustment in the Fed’s rate outlook.
As for the rest of today’s bond trading, there’s not much to be said until yields make a move outside the current consolidation pattern. It’s another waiting game until then.