while we slept; THE quote heard 'round the world; current and previous yield peaks; 'the most important chart in macro'
Good morning … What the FED SAYS and what the data suggested all added up to another volatile day in markets. Jumping right in … when The Fed SAYS (On p9, bottom RIGHT),
… Many participants judged that a SIGNIFICANT RISK now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted…
… Said differently, along with realized price data, Powell is acting aggressively to moderate inflation expectations further. Here’s one version (DB) of what they mean
Underlying inflation underscores Fed's unconditional commitment
… Fed officials see a "significant risk" that persistently elevated inflation could lead to an unanchoring of inflation expectations that would require an even more painful adjustment to the monetary policy stance. As things stand, rising underlying inflation coupled with risks of a recession occurring sooner than our base case view of mid-2023, could well lead to difficult policy decisions over the coming quarters …
Measures of broad-based US inflation continue to reach new highs
… here is a snapshot OF USTs as of 731a:
Also maybe interesting to note 50dMA comes in today @ 3.14%
… HERE is what another shop says be behind the price action in their morning commentary, The Changing Jobscape
Overnight Flows
Treasuries were under modest pressure during the overnight session with the 2s/10s curve remaining inverted. Overnight volumes were light with cash trading at 76% of the 10-day moving-average. 5s and 10s were tied as the most active issues, each taking 32% marketshares. 2s and 3s combined to take 23% at 15% and 8%, respectively. 7s managed 8%, 20s 1%, and 30s 5%. We’ve seen buying in the short end and two-way flows in 10s.
… and for some MORE of the news you can use » IGMs Press Picks for today (7 July) to help weed thru the noise (some of which can be found over here at Finviz).
Moving on and looking further backwards — data and evolution of prices yesterday, well … A bit of stagflation just ahead? ZH,
But wait, there’s less … ZH,
These two points of data shed some light on increased volatility and decreased liquidity of the UST market (both topically noted yesterday HERE) and these daily swings of 10-15bps are NOT signs of healthy markets and likely one reason why stocks aren’t willing to lean on the ‘good’ news of yields hopefully having peaked 3mos ago.
As if that weren’t enough, recent FOMC meeting (mins) all but guarantees the outcome. ZH,
FOMC Minutes Show "More Restrictive" Fed Worried About 'Entrenched' Inflation
Back TO the Global Wall Street inbox where everyone wants to know (or claims to have THE key insights), what it is LPL offers,
What Happens After a Historically Weak Quarter for Stocks and Bonds
… We remain in a turbulent period for markets and the economy. While we don’t believe anything more than a mild recession is priced into the S&P 500 and see potential for more volatility, we think the S&P 500 still has the potential to see solid gains from here by year end, driven by earnings and some multiple expansion as inflation potentially starts to settle down. Bond returns will depend, in part, on how aggressive the Fed needs to be, but weak four-quarter periods (and this is the weakest on record for the Agg) tend to be followed by greater stability.
Easy peasy …
If you’d prefer COMEDY to relative ease,
Paul Donovan / UBS: Comedy central
Federal Reserve minutes stated "elevated levels of inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted”. This is pure comedy. Few US citizens know what the Fed is, fewer still understand the relationship between Fed policy and inflation. Some might question how many members of the FOMC understand the relationship between Fed policy and inflation.
Fans of the Mr Bean films will find UK politics entertaining. Otherwise, investors need to focus on when taxes will be cut. UK Prime Minister Johnson and any members of the government who remain preside over one of the biggest tax grabs of modern times. If Johnson stays, tax cuts will be required to cling to office. If Johnson goes, the next prime minister will cut taxes to signal change. Meantime, the government has too few ministers in office to be able to govern…
Comedy aside, another CHART from a large German bank showing belief that inflation genie will be back IN the bottle in ~3yrs time.
Back at target?
The USD breakeven market is pricing that US inflation will be back to target within three years. Assuming a 50bp PCE/CPI wedge, 2y1y breakevens are back in line with the 2% Fed target…The market is pricing that US inflation will be back to target within three years
Finally, a couple things from the CHARTS department, a word about how similar the current yield peak looks relative to previous ones (highlighted below),
Since we’re going to end with CHARTS, HERE is one from twitter and EPBMacro which I think you should let sink in.
Think about it as we sit here and wait for the next iteration of Lacy Hunts quarterly visions. Note the difference between Eric and Lacy, as one fintwitter did. Eric does both cyclical AND secular while Lacy ONLY thinks / writes secular…Catching the CYCLICAL views SHOULD keep you on the right side of whatever is the history we’re living through, at that moment. Not JUST the lower rates regime.
… THAT is all for now. Off to the day job…