The better than expected unemployment number, showing some evidence that we may have turned the corner, was a jolt to many economic forecasters. Small construction spending improvements translated quickly into jobs. Construction continues to be the main catalyst for job improvement. The chart below shows the US unemployment rate - seemingly leveling off.
Bonds reacted violently. If the economic improvement is real, these yields are still way too low, given all the new supply coming in.
10-year treasury yield:
All the eyes from this point on are on the Fed. The Fed Funds futures are forecasting a series of rate hikes, with 25 bp by Feb-10 and another 50 by May. All in, the futures are pointing to at least 100 bp move by this time next year.
Fed Funds futures implied rate
As we discussed before, monetary conditions continue to be highly accommodative based on historical levels, and asset inflation is not out of the question. But for now, asset inflation is exactly what the Fed is looking for.