Bonds Are Still Living in Phillips Curve World. The Fed Isn’t.
The yield on 10-year Treasuries surged as much as 17 basis points after a strong jobs report, signaling the markets are still taking their cues from an economic idea that’s been around since the 1950s.
Hopping off the Phillips Curve.
Photographer: Alex Wong/Getty Images
The bond market is still thinking about monetary policy through a Phillips Curve frame of mind. On the back of a strong employment report Friday, yields on 10-year Treasury bonds surged to a 16-year high, reflecting the belief that hot labor markets drive inflation and, thus, monetary policy will have to tighten further. Thankfully, the Federal Reserve is moving away from such thinking.
Consider the report itself. US payrolls added 336,000 jobs in September, far exceeding the highest economist forecasts in a Bloomberg survey (high 250,000; median 170,000). The two previous reports were also revised up by 119,000. But crucially, the labor market strength hasn’t been accompanied by renewed signs of upward wage pressure, which can fuel corporate costs — especially in service-related industries — and ultimately higher prices. That meaningfully impacts interpretation of the data, but don’t take my word for it.