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Market Additional: Merchants who will not be deterred by the depressing job development in December proceed to cost in an "earlier and quicker" tightening of the US Federal Reserve

Interest rate traders continue to price in the prospect of an aggressive start to the Federal Reserve's next rate hike cycle in the coming months, despite disappointing December job growth of 199,000 announced on Friday.

According to the job report's release, futures showed a 71 percent chance of a 25 basis point hike in March and a 29 percent chance the Fed Fund's target rate will be 50 basis points higher than it is now until the Fed's May meeting, so the FedWatch from CME tool. That's not far from where both odds were on Thursday. Such moves would raise the Fed Funds rate target to 0.25% to 0.5% in March and 0.5% to 0.75% in May from currently zero to 0.25%.

Also on Friday, overnight indexed swaps reflected the likelihood that Fed officials would come up with more than a single 25 basis point hike by the end of their May meeting, according to Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York .

Source: Bloomberg LP

The market is trying to absorb the notion of what Emons is calling a "double" tightening of the Fed after the central bank's December minutes revealed on Wednesday that almost all policymakers were keen to see the Fed's balance sheet of more than US $ 8 trillion -Dollars reduce point, in conjunction with walking tariffs. Friday's job report contained enough encouraging ingredients – such as falling unemployment, higher average hourly earnings, and job gains in previously hard-hit sectors like leisure – to "raise expectations for earlier and faster Fed policy tightening" earlier in the day. said the strategist.

Read: The US labor market report isn't as weak as it looks for the second straight month. Here's why.

"The headline digit count was a bit misleading and there are many elements in the report that suggest the US may be nearing maximum employment," Emons said on the phone. "The market is trying to explore this possibility of double or double tightening and doesn't know what impact a smaller balance sheet will have, so it extrapolates that into Fed fund futures."

"The market is pricing in a campaign of earlier and faster tightening," he said.

Expectations for a more aggressive hiking campaign are also projected on real returns, which have risen from the heavily negative levels on Friday. Interestingly, despite the recent sharp gains, these expectations are still not fully reflected in nominal US Treasury bond yields.

Read: "To be honest, I'm surprised at how little yields have moved since the Fed minutes while the job report is coming up"

By late Friday afternoon, government bond yields posted their largest one-week spike in years, helped by further hikes in most rates that day. The 10 year rate of return
TMUBMUSD02Y,
0.866%
rose 27.3 basis points to 1.77% this week, which is the largest weekly gain since September 13, 2019, according to Dow Jones Market Data.

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On Friday, San Francisco Fed President Mary Daly said the central bank could start shrinking its balance sheet after a rate hike or two. Her remarks came a day after her St. Louis colleague James Bullard said the first rate hike could come as early as March. Bullard is a 2022 voter on the Federal Reserve's Rate-fixing Open Market Committee.

"Today's employment report is a bit mixed, but net-net will continue to support the Federal Reserve's restrictive stance investors are preparing for this week," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York . which managed $ 307 billion as of September.

“The risk is that in a year where we expect economic growth to slow naturally, the Fed will tighten too much and the Fed will pivot what will be a slowdown as early as the second half of this year would be made worse, ”said Grohowski on the phone. "That is not our central forecast, but the market has given some thought."

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