After the winter slump, a more constructive economy and rising inflation pressures are starting to be priced by US fixed income markets, notes Barclays Capital.
"The recent backup in US rates has been driven mainly by higher real rates but also higher inflation breakevens. Of the roughly 18bp move in 5y5y nominal rates since mid April about 11bp has been in 5y5y real rates and the remaining 7bp the 5y5y inflation breakeven," Barclays adds.
"A Fed that sees the Q1 slowdown as transitory amid rising inflation pressures (jobless claims at 15 year lows and a rebound in the employment cost) and too little priced by way of rate hikes in 2015 (a little less than one priced by December and only a 36% probability priced for September), implies that risk reward favors higher rates and a stronger USD. We believe that data this week could serve as such a trigger," Barclays argues.
Payrolls data will be the key event on Friday.
"We are looking for a 250k headline print, significantly above the consensus forecast of 230k. Furthermore, we expect the tightening in labor markets to continue with the unemployment rate declining to 5.4% (c.f. 5.4%) and average hourly earnings rising 0.3% m/m (c.f. 0.2% m/m).," Barclays projects.
Other data to look for include the ISM non-manufacturing index (Tuesday) and unit labor costs (Wednesday).
"We are slightly below consensus on the ISM non-manufacturing (56.0 vs. c.f. 56.2) but expecting an above consensus print for unit labor costs (3.8% q/q vs. c.f. 3.6%)," Barclays adds.
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