US10Y At Neckline

Source: www.tradingview.com

The US10-Yr Treasury yield is up sharply for the week, currently trading at 1.68%. The nominal rate is now trading at the neckline of the inverse head and shoulders pattern. A break above the neckline will effectively complete the reversal pattern and signal that the market is pricing in higher real yields, inflation, or a combination of both.

Initial jobless claims surprised by significantly beating the consensus of 259K. The print came in at an astounding 199K, which is the lowest level since 1969. This set off bond selling, with the US10Y nominal yield jumping, as the market digested the print.

Whilst inflation has been the center of the debate surrounding monetary policy, the US labour market has seemingly been less robust in its recovery. However, this initial jobless claims number introduces a new dynamic to the debate. One would be forgiven for questioning if today's number is an outlier. However, policymakers will take notice and if a trend emerges this is likely to affect the trajectory of monetary policy, including possible faster tapering of the Fed's asset purchasing program and a rethink of timing in terms of rate hikes.

H4 US10Y Chart Suggests Aggressive Change In Expectations

Source: www.tradingview.com

The H4 chart of the US 10Y Treasury also shows an inverse head and shoulders. This pattern has effectively reversed the decline in the yield that started 21 October. However, the positive slope of the red neckline makes for an aggressive reversal. This suggests that market expectations are changing - a faster contractionary monetary policy is now a distinct possibility and is being discounted. We can point to any number of data points from hotter core inflation, the nomination of Fed Chair Powell for a second term, a worry of an exhuberant and overvalued stock market, and now a tighter labour market. The Fed seemingly is running out of excuses.