Goldman Sachs: Macro Data Flow Yields Yet Another Reversal

Goldman Sachs note that “following a sharp rally, 10-Year year U.S. Tsys have sold off by about 25bp from recent lows over the past few days, responding fairly strongly to modest upside surprises in both the ISM services reading and the labor market report. Overall, the latter suggested an overheated labor market that has only just started to slow, which in conjunction with the fairly hawkish tone from last month's FOMC minutes on inflation strongly indicate the Fed is on track for a 75bp hike later this month. June’s CPI report, where we expect faster deceleration than consensus, will likely be the next key data point in determining the near term direction of yields. An upside surprise could see more premium for a 75bp hike build at the September meeting, although a consideration against this possibility is that by reaching its longer-run level projection with a 75bp hike at the July meeting, the FOMC may be inclined to slow the pace of tightening to 50bp (in line with our economists’ views). Beyond market pricing for the next few meetings, the conflicting impulses of slowing growth and sticky inflation on yields are more balanced in the US than in the Euro area, in our view. This means that although an upside surprise in inflation could lead an extension of the current selloff, the magnitude of such a move would likely be somewhat limited, with yields remaining in the vicinity of our 3.2-3.3% forecast for H222.”