Goldman Sachs: Data To Dictate Potential Bounds On Fed Pricing

{US} US TSYS: Goldman Sachs note that the "June labor market report will provide the first major post-FOMC data point as the market contemplates risk around the start of taper (and eventually liftoff). While our economists still expect a formal announcement in December (and a very low probability of an earlier one in September), from a market perspective we think that an acceleration in the pace of hiring from last month would be sufficient to keep the perceived risk of a September announcement alive, while a substantial upside surprise could see the market more firmly pull liftoff pricing into late 2022. We expect sensitivity to data surprises to rise in absolute terms and migrate in on the curve compared to the last 1-Year, with the 5-Year sector likely the most reactive going forward, somewhat similar to the pattern seen in the years preceding liftoff last cycle. We do not, however, expect a steepening of the Fed path on better data to translate to a decline in intermediate forward yields. Further price action of that nature would be increasingly self-defeating by lowering the ceiling on how much further 5-Year yields can plausibly rise. Instead, a substantial selloff from here likely needs participation from these intermediate forward points as well, as front-end curves have only limited room to steepen to historical highs given the low level of 5y5y yields. On balance, the view that a material intensification of upside risks to the Fed path also requires the market to price in a higher terminal rate suggests shorts in the belly of the curve are a cleaner way to position for an extension of repricing the Fed."