Impaired Liquidity And A Lack Of Conviction May Cloud Post-NFP Price Action

A couple of sell-side surveys covering positioning and conviction matters seem to flag some indecision/a lack of conviction after a volatile start to ’22 has seen the ICE/Bank of America MOVE index surge back towards its recent peak, which was observed back in the depths of the initial COVID outbreak during Mar ’20.

• Earlier this week the J.P.Morgan rates strategy desk noted that “risk appetite has fallen, and this is evident in our Treasury Client Survey: the share of neutrals climbed to 74%, the highest since August 2017, and in reality amongst the highest readings we have observed over the last 15 years. In our minds, it’s likely this reflects relatively low conviction, as investors try to calibrate the Fed’s reaction function, amid both persistently above-target core inflation and a growth outlook that has weakened decisively.”
• More recently, a BMO survey noted that when it comes to the next move in 10-Year Tsy yields “46% see 2.50% being reached ahead of 3.50% and 54% see 3.50% initially.”
• With 10-Year yields trading around the mid-point of that range at present, the above lack of conviction, coupled with ongoing impaired liquidity in the Tsy market could make for an interesting round of post-NFP price action. An idea that is probably compounded by the Fed’s focus on suppressing inflation even if it comes at the expense of economic growth, which limits the read-through of today’s payrolls release when it comes to wider market pricing of future Fed policy.