The better than expected unemployment number, showing some
evidence that we may have turned the corner, was a jolt to many
economic forecasters.
Small construction spending improvements translated quickly
into jobs. Construction continues to be the main catalyst for
job improvement. The chart below shows the US unemployment rate
- seemingly leveling off.
Bonds reacted violently. If the economic improvement is real,
these yields are still way too low, given all the new supply
coming in.
10-year treasury yield:
All the eyes from this point on are on the Fed. The Fed Funds
futures are forecasting a series of rate hikes, with 25 bp by
Feb-10 and another 50 by May. All in, the futures are pointing
to at least 100 bp move by this time next year.
Fed Funds futures implied rate
>
As we discussed before, monetary conditions continue to be
highly accommodative based on historical levels, and asset
inflation is not out of the question. But for now, asset
inflation is exactly what the Fed is looking for.