Jobs day in 'merica! 2Y up 3bps to 4.92%, 10Y at 4.18%. If you're up for NFP guesses, submit your guesses in the comments. Prices Right Rules. Estimates +200K headline with 3.6% UE Rate and 4.2% AHE. Yields continue to rise with the 10Y hitting YTD highs 4.18%, can it get to Oct 2022 on a blowout jobs report? Across the pond there was a big beat in German factory orders, which seems good considering their data has generally been weak. Speaking of beats AMZN beat on earnings by a lot (see last comment to post yesterday), so I guess we all still have money to spend. I don't usually engage in NFP guesses, but when in Rome, so I'm going +900K. The logic we hired a ton of students. Per GS: "When the labor market is tight, payroll growth tends to remain strong in July, with average payroll gains 15k above the full-year average (see Exhibit 2). We believe this reflects the interaction between labor availability and the spring hiring season: seasonal labor market slack peaks at the start of the year, troughs in early May, then rebounds in June and July with the arrival of the student summer workforce."....I'm kidding on +900K by the way (maybe). Not much else on the calendar, so you can get back to worrying about the U.S. Fiscal situation.
"We think they are days from failure. They think it is a temporary problem. This disconnect is dangerous."
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+187K is the number...but AHE +4.4% above estimates and Unemployment Rate falls to 3.5%
ReplyDeleteYields down further, 2Y at 4.81 and 10Y at 4.09
ReplyDeleteo capstone a week that include a downgrade of U.S. debt you can be comforted by research by the St. Louis Fed:
ReplyDeleteFiscal dominance refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low.
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. The use of non-interest-bearing debt as a means of funding is also known as "inflation taxation." Fiscal dominance leads governments to rely on inflation taxation by "printing money" (increasing the supply of non-interest-bearing government debt)
not all real deficits are feasible to fund with inflation taxation.
some changes in policy with respect to reserve requirements are likely if fiscal dominance becomes a reality. The existing amount of the zero-interest debt (the inflation tax base) is currently limited to only currency, given that bank reserves bear interest today
it is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.
The history of inflation taxation around the world has shown that when governments become strapped for resources, they often use zero-interest reserve requirements to tax banking systems and remove their spending constraints.
An alternative policy path, of course, with less inflation taxation, would be for the government to decide to reduce fiscal deficits and thereby avoid the need for rising inflation and its adverse consequences for the banking system. This may be a hard policy to enact, however, given that the main contributors to future deficits are large Medicare and Social Security entitlement payments. Also, defense spending seems likely to rise as the result of increasing geopolitical risks related to China. Increased income taxation is another alternative, but this too may be unlikely, not only because of the lack of political consensus about taxation but also because it would reduce growth in income, which would partly offset any deficit reduction coming from projected increases in the ratio of taxes to income. Ultimately, it seems likely that the US will either have to decide to rein in entitlements or risk a future of significantly higher inflation and financial backwardness.
https://research.stlouisfed.org/publications/review/2023/06/02/fiscal-dominance-and-the-return-of-zero-interest-bank-reserve-requirements