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LIVE MARKETS Bond investors see low terminal rate, Fed able to curb inflation

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  • U.S. payrolls 210k vs 550k est
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  • 10-yr U.S. Treasury yield ~1.45%

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BOND INVESTORS SEE LOW TERMINAL RATE, FED ABLE TO CURB INFLATION (1000 ET/1500 GMT)

Bond investors see benchmark U.S. interest rates staying at historically low levels even after the Federal Reserve completes its upcoming rate hike cycle, which may reflect confidence that the rate increases will succeed in stemming runaway inflation.

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Eurodollar futures expiring in Dec. 2026 are currently pricing in a fed funds rate of 1.50% to 1.75%, which is well below previous tightening cycles, and trading in overnight index swaps indicates a similar level.

“The market anticipates that the Fed is able to quickly bring inflation under control” said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

“What the market‘s telling you is that it expects a rather quick pivot to hikes from the Fed, a fairly swift hiking cycle, but one that is quite short and that ultimately the required amount of tightening to curb inflation really is only 6 hikes or so, which is an historically modest amount,” Cohn said.

Some investors, however, see risks that the market is underpricing where the rate will ultimately rise to, if inflationary pressures persist.

“We see significant risks to the upside in terms of the duration and intensity of inflationary pressures due to elevated wage growth, input prices and supply shortages. These upside risks carry over to the speed and magnitude of the expected Federal Reserve tightening cycle,” Jim Smigiel, chief investment officer at SEI said in a note this week.

Historical

(Karen Brettell)

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WALL ST POISED FOR HIGHER OPEN AFTER PAYROLLS (0849 ET/1349 GMT)

U.S. equity index futures were pointing to a higher open on Friday, in the wake of a November payrolls report that showed employment increased far less than expected.

Nonfarm payrolls increased by 210,000 jobs last month, the Labor Department said, well below the 550,000 estimate, while the unemployment rate dropped to 4.2%, the lowest since February 2020, from 4.6% in October. read more

Futures initially jumped in the wake of the report, possibly as some investors read the headline miss as a reason the Federal Reserve may delay its plans to begin tapering its bond buying program after Chair Jerome Powell struck a more hawkish tone earlier this week.

"The futures seemed to like it, that top line number, maybe people are thinking that although Powell talked this week about the taper maybe this slows the pace or slows them starting it," said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

"The rally here may be top line related but when you add that top line with the employment rate it is hard to square the circle so we’ll see if the buying momentum can last off of that."

Below is your premarket snapshot:

Futures higher after payrolls report

(Chuck Mikolajczak)

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FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0830 EST/1330 GMT - CLICK HERE: read more

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