The latest jobs report may not be a game changer for the Federal Reserve’s easy money policies.
According to Wells Fargo Securities’ Michael Schumacher, it’s premature to assume July’s strong numbers will push the Fed meaningfully closer to tapering its monthly bond purchases.
“This report was pretty strong. Not a blockbuster,” the firm’s head of macro strategy told CNBC’s “Trading Nation” on Friday. “If there’s another strong one after it, it’s conceivable the Fed may start talking about tapering in a pretty serious way. Let’s say in October.”
Under Schumacher’s scenario, the Fed could start to implement tapering as soon as this November. The move would likely put upward pressure on the benchmark 10-year Treasury Note yield.
But there’s a wildcard to Schumacher’s forecast: Covid-19 delta variant cases. The surge could put negative pressure on yields.
“It’s an open question just how severely delta turns out to be and also how aggressively governments react to it,” he said.
Schumacher doubts the government will issue dramatic lockdowns, but he warns new constraints on movement would hurt economic activity.
However, his overall worry affecting the bond market is sticker than expected inflation. Schumacher is concerned it would spark a significant jump in yields.
“The thing is no one has really dealt with a pandemic. We haven’t had one in a hundred years,” he said. “So for anyone to say with a lot of confidence that inflation is going to go up and come down pretty dramatically and be back to ‘normal in four months or six months’ or something like that seems a bit foolish to us.”
On Friday, the 10-year yield closed at 1.30%. It rose 5% last week and is up 42% so far this year. Ultimately, Schumacher believes it will rise and end the year between 1.60% and 1.90%, below the forecast he delivered on “Trading Nation” in June.
“As far as the bond market goes, I’d say you want to stay out of trouble,” Schumacher said. “The way to really avoid difficulty there is to stay pretty short maturity. So perhaps three years and in, something like that. No one is going to make a ton of money doing that, but at least they’ll be relatively safe.”