The benchmark 10-year Treasury yield fell about 2 basis points, but the 2-year yield dropped more than 5 basis points, resulting in a widening yield spread. Currently, the spread sits at 58 basis points, which could be a sign that the market expects to see higher inflation in the future.
In relation to the Fed, this may mean the central bank could push rate cuts further into the future. This would support higher yields and a stronger U.S. Dollar.
Oil and Payrolls Are Running the Show
The key drivers of the DXY today are oil prices and the non-farm payrolls report. Another spike in oil prices lent support to the dollar early in the session on fears it is going to push up headline CPI inflation. Not only is the jump in Brent futures to $92 a barrel a key influence, but also gasoline prices are up nearly 27 cents this week.
Perhaps putting a lid on yields today was the surprise weakness in February payrolls. According to a government report, U.S. employers cut 92,000 jobs last month, sending the unemployment rate to 4.4%, up from the previously reported 4.3%. Economists were looking for payrolls to increase by 50,000.
Stagflation Risk Puts the Fed in a Tough Spot
The numbers indicate the Fed is going to have to address the issue of rising inflation and falling employment in order to dampen the odds of stagflation. On one hand, the weakening labor market opens the door to a June rate cut, but rising inflation means they may have to sit that one out just like they are expected to do in March. It essentially depends on when the war between the U.S. and Iran ends and how fast oil prices can fall back to reasonable levels.
Late in the session on Friday, the CME’s FedWatch Tool shows no cut in March and June. However, the odds of a rate cut in July jumped to 44.5%.
