Flash: QE not a relic of the past just yet – Deutsche Bank

FXstreet.com (New York) - Friday's US payroll number was in the channel that won't really change anyone's opinion on the tapering debate.

Whilst the headline (175k v 163k) was stronger-than-expected, the unemployment rate edged up, (7.6% vs. 7.5% expected) even if this was down to an increase in the labor force participation rate. According to Macro Strategy Analysts J. Reid and C. and C. Tan at Deutsche Bank, “Expect the will they/wont they tapering debate to continue to ebb and flow for the next few days/weeks.” On Friday there was relief that the number was relatively healthy but not one that forces the Fed's hands.

The S&P 500 closed +1.28%. However the number was firm enough to push 10yr UST 10bp higher to 2.17%. Interestingly the recent rise in 10yr yields has coincided with declining inflation expectations (as measured by US 10yr breakeven rates). The combination of higher nominal yields and lower inflation expectation has seen real yields risen sharply in the recent weeks to close in positive territory (0.0195%) for the first time since January last year.

The success of financial repression relies heavily on keeping bond yields below inflation and nominal growth so this recent move is a worry. “Things like this and the fact that the recovery is still only steady, means that we think the Fed will have to keep QE going for longer than current expectations suggest even if they do reduce purchases.” they add.