An overly pessimistic outlook on US unemployment might set the stage for a turbulent end to SSA issuance this year. The market is pricing in a quick loosening of monetary policy, and this strengthens the case for early public sector issuance.
In Jerome Powell’s much anticipated speech at Jackson Hole on Friday, the Federal Reserve chair made it clear that “the time has come” for interest rates to fall. While Powell did not give any clues away as to the magnitude of the incoming rate cut, there is a growing sense that unemployment figures be of growing importance in the decision, pushing inflation aside.
This shift in focus may validate how early SSA issuers resumed benchmark issuance after the summer lull this year. Within four working days last week, issuers had priced $31.5bn-equivalent worth of core currency benchmarks, nearly 28% higher than the volume done in the first week of benchmark issuance in August 2023.
If the perception is that the Fed is now fixating on the jobs market, this leaves bond yields more susceptible to economic data.
In the last few weeks, weak employment data and corporate earnings have punctured the ‘soft landing’ narrative for the US economy, precipitating a fall in stock markets and leading to calls for emergency interest rate cuts.
With more economic data to come in the form of non-farm payrolls on September 6, and personal consumption expenditure figures due on Friday, there is much that could disrupt stable bond yields ahead of the Fed's next interest rate decision in the middle of next month.
And that's before any consideration as to what the US election in November could throw up. The race threatens to be close with one candidate judged to be light on policy, while the other has a reputation for making it up as he goes along.
Donald Trump has already urged the central bank not to cut rates this year, and if the former president is re-elected, he may well try and influence the Fed's decision making.
No one knows how rough the terrain will be leading up to the US election, or beyond. Early and prudent issuance has been the right move for the last two years. Once again the strategy will likely prove the most responsible approach with the public purse at stake.