Why Treasury Yields Surged Yesterday (Hint: Inflation)

What’s in Today’s Report:

  • Why Treasury Yields Surged Yesterday (Hint:  inflation)

Futures are flat as markets digest Thursday’s rally and consider multiple reports that a debt ceiling deal is imminent.

Numerous media outlets have reported a two-year debt ceiling deal is imminent, and if that becomes official today we should expect a modest and temporary rally.

AI optimism/euphoria continued overnight with Marvell Technologies (MRVL) rising 18% on strong AI guidance.

Focus today will first be on the debt ceiling, and if a formal deal is announced with should expect a knee jerk rally, although by itself a debt ceiling compromise won’t be a sustainable bullish catalyst.  Outside of the debt ceiling, the key reports today include the Core PCE Price Index (E: 0.3% m/m, 4.6% y/y)  and Durable Goods Orders (E: -1.1%) and investors will want to see stability in both reports to hint at ongoing disinflation and a soft landing.  We also get Consumer Sentiment (E: 58.0) and if inflation expectations rise further in that report, it could become a headwind on stocks.

Tom Essaye Quoted in Blockworks on February 24th, 2023

Risk-Off Is Back: Crypto, Equities Slide on Persistent Inflation

“To be clear, the report won’t be enough to change the Fed’s thinking (this is very old data at this point) nor was it enough to move bonds or currencies, but for a market that’s concerned about stagflation, this report won’t do anything to ease those concerns.” Tom Essaye added. Click here to read the full article.

Four Pillars of the Rally Remain Intact

What’s in Today’s Report:

  • Bottom Line – Four Pillars of the Rally Remain Intact
  • Weekly Economic Cheat Sheet – Flash PMIs and Core PCE in Focus

Stock futures are trading cautiously higher this morning while international equities were mixed overnight as markets attempt to stabilize following last week’s volatile, Fed-induced declines.

News flow was quiet over the weekend as there were no major economic releases or central bank developments however the yield curve remains in focus as several key spreads have flattened to multi-month lows on hawkish policy expectations and a more cautious growth outlook.

There are no notable economic reports and no Fed officials are scheduled to speak today.

The lack of market catalysts will leave investors to continue to digest last week’s Fed developments and closely monitor the bond markets for further clues on expectations for both monetary policy and the state of the economic recovery.

Summer Market Events Part 2: The Fed

What’s in Today’s Report:

  • Key Summer Market Events for the Fed

Futures are drifting modestly higher following a generally quiet night of news.

Economic data was solid as European Commission Economic Sentiment beat estimates (114.5 vs. (E) 112.1) while the Japanese unemployment rate was in-line with expectations.  But, neither number is moving markets.

Earnings overnight were very strong (especially in the retailers like COST) but questions remain about the sustainability of the results so they aren’t causing a big rally.

Today focus will be on the Core PCE Price Index (E: 0.7% m/m, 3.0% y/y). The market expects and has priced in a strong number, so something slightly above estimates should not cause a hawkish reaction (yields higher/stocks lower).  But, if we see the Core PCE Price Index print close to 4% yoy, that would likely be a headwind on stocks (and push the 10 year yield towards 1.70%).