The Market Today
10-Year Yield Jumps Above 1.50%
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC DATA
Durable Goods Orders Data Show Strength in Business Investment, Commercial Airplane Demand: Durable goods orders jumped 1.8% in August, much stronger than expected, on an outsized increase in nondefense aircraft. Boeing reported orders for 53 aircraft during the month boosting the category 78% MoM. Excluding transportation items, core durable goods orders were disappointing, rising just 0.2%. Contributing to the weakness, motor vehicle and parts orders fell 3.1% as the supply chain remains constrained slowing the entire sector. Computer and related product orders also fell 2.4%. However, core capital goods shipments, a proxy for business investment in equipment, were revised up in July and rose more in August than expected, up 0.7% MoM. Through two months of data, shipments points to business equipment investment near 8.5% (QoQ, SAAR) in 3Q. Looking ahead, core capital goods orders also beat expectations, rising 0.5%.
Fedspeak: This week will bring a flurry of post-FOMC Fed speakers, kicking off today with Chicago’s Evans (7:00 a.m. CT), New York’s Williams (8:00 a.m.), and Governor Brainard (11:50 a.m.).
Fiscal Drama: Yesterday evening, House Speaker Pelosi said the House would vote on the $550 billion bipartisan infrastructure spending bill on Thursday. The package was slated for a vote today but progressive Democrats pushed back, saying they had 60 votes against as they try to retain their leverage to muscle through the larger, $3.5T Build Back Better plan. Fiscal policy continues to hang in the balance with progressive and moderate Democrats at an impasse on 1) the bipartisan infrastructure bill, 2) the Build Back Better plan, and 3) tax changes / funding for these programs. Potential collateral damage from the negotiations include a growing risk for a government shutdown and a non-zero risk of a technical default on Treasurys if the debt ceiling is not raised in time.
Nascent Jump in Treasury Yields Pushes 10-Year Above 1.50%, 5-Year Close to 1.00% for First Time Since February 2020: Longer maturities continue to lead an upward shift in the Treasury curve Monday, adding to gains from last week that pushed yields to multi-month highs (more below). The Fed’s hawkish tilt last week, which was echoed by the Bank of England a day later, refocused investors on a potential change in the tide away from emergency-level monetary policies. Inflation pressures have been stronger for longer than officials previously anticipated amid persistent disruptions to the supply side of global economies. At 7 a.m. on Monday, the 10-year Treasury yield was 3.6 bps higher at 1.49%, its highest level since late June, and the U.K.’s 10-year yield had added 3.9 bps to 0.96%, a high mark since May 2019. While reflecting back on last week, investors also have plenty to contemplate on the current week’s calendar. Oil prices gained another 1.5% overnight as part of a broader rise in global energy prices, pushing U.S. WTI above $75 a barrel and to the top of a multi-year range. In addition to a packed schedule of economic releases, fiscal negotiations in Washington will increasingly attract attention with the government’s spending authority scheduled to lapse first thing on Friday. After mixed global trading, S&P 500 futures had erased a 0.6% overnight gain to trade down 0.3% at session lows at 7:20 a.m. CT. At 7:30 a.m., the Treasury curve had risen further, pushing the 10-year yield 5.0 bps higher on the day and above a key mental level of 1.50%. The 2-year yield was 1.2 bps higher at 0.28% while the 5-year yield had gained 4.1 bps to 0.99%, its highest level since February 27, 2020.
ICYMI – September 24, 2021 Weekly Market Recap: Treasury yields fell early Monday amid a global equity rout that was blamed on a growing list of uncertainties. One of China’s largest property developers appeared to be headed toward financial calamity. The Delta variant’s global spread continued to show signs of slowing down the economic recovery and enhancing supply-side disruptions that have boosted inflation to uncomfortably high levels. In the U.S., a partial government shutdown remains a risk and the Treasury believes it could run out of cash in October if the debt ceiling isn’t suspended. The House passed a bill Tuesday to address both issues but Senate Republicans have balked at supporting a debt ceiling increase. The market’s tone turned sharply Thursday, however, a day after the Fed signaled it would likely announce the start of tapering in November and the dots showed officials contemplating a quicker and steeper liftoff, with the first rate hike possible as early as next year. Updated economic projections implicitly tied the hawkish tilt to increasing discomfort with stronger inflation pressures amid persistent bottlenecks and worker shortages. The Bank of England described a similar worldview Thursday, noting those same dynamics had strengthened the case for raising rates. Ten-year sovereign yields in the U.S. and U.K. jumped more than 10 bps on Thursday alone. For the week, the 10-year Treasury yield rose 8.9 bps to close at 1.45%, the highest level since July 1. The 2-year yield added 4.8 bps to 0.27%, its highest mark since March 2020, and the 5-year yield added 8.7 bps to 0.95%, the highest level since April. Click here to view the full recap.