The latest job report may not change the Fed’s easy money policy.
Wells Fargo Securities’s Michael Schumacher said it’s premature to assume that July’s strong numbers will bring the Fed much closer to curbing monthly bond purchases.
“That report was pretty strong. Not a blockbuster,” the company’s head of macro strategy told CNBC’s Trading Nation on Friday. “If there’s another strong one after that, chances are the Fed will be talking seriously about tapering. Let’s say October.”
According to Schumacher’s scenario, the Fed could start tapering as early as November. The move would likely put upward pressure on the benchmark 10-year Treasury Note yield.
But there is a wildcard for Schumacher’s forecast: cases of Covid-19 Delta variants. The rise could put yields under pressure.
“It is an open question how strong the delta is and how aggressively governments are reacting to it,” he said.
Schumacher doubts the government will impose dramatic lockdowns, but warns that new restrictions on movement would affect economic activity.
His general concern for the bond market, however, is more than expected inflation. Schumacher fears a significant jump in returns.
“The thing is, nobody really looked at a pandemic. We haven’t had one in a hundred years,” he said. “So when someone says with great confidence that inflation will go up and down pretty dramatically and be back to normal in four months or six months, or something like that, it seems a bit foolish to us.”
On Friday, the 10-year yield closed at 1.30%. It rose 5% last week and 42% so far this year. Ultimately, Schumacher expects it to rise between 1.60% and 1.90% and end the year below the forecast he made on Trading Nation in June.
“As for the bond market, I would say you want to stay out of trouble,” said Schumacher. “The way to really avoid trouble is to keep it on a fairly short term. So maybe three years and later, something like that. Nobody’s going to make a lot of money with it, but at least they’re relatively safe.”
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