The Market Today

Market-Based Inflation Expectations Hit 3.00%

by Craig Dismuke, Dudley Carter


Purchasing Managers Indices and Monthly Deficit: The October Markit PMIs covering the manufacturing and services sector are both scheduled for release at 8:45 a.m. CT.  The manufacturing index is expected to inch lower while the service sector index is expected to improve.  Both reports have repeatedly cited the supply chain problems and labor shortages as hindering output. Also today, Treasury is scheduled to release its September Monthly Budget Statement. 

Fedspeak: San Francisco Fed Bank President Daly is scheduled to speak at 9:00 a.m. CT.  More influential to the markets will be Chair Powell’s comments at 10:00 a.m.



Existing Home Sales Jumped in September Reflecting Resilient Demand Amid Headwinds: Existing home sales rose 7.0% in September to 6.29mm annualized units, beating expectations for a 3.7% gain and notching the strongest month for sales since January. Excluding the 2020 volatility, the gain was the strongest for the month of September in records back to 1999. Sales slowed early in 2021 from a 15-year peak late in 2020 as falling inventories led to record annual price gains. In recent months, however, supply pressures eased modestly and annual price gains moderated somewhat, two factors the National Association of Realtors credited for last month’s improvement. In September, months supply tightened for the first time since December from 2.6 to 2.4 while the 13.3% annual price increase, historically rapid, marked the slowest pace of the year. The positive update on sales indicates that underlying demand for previously-owned homes remained strong in September, in spite of headwinds.


S&P 500 Hit New Record as 5-Year Inflation Expectations Eclipsed Highest Level Since 2005: U.S. equities fluctuated between gains and losses Thursday as investors kept a watchful eye on rising inflation expectations that pushed Treasury yields back to their highest levels in some time. Strong corporate earnings so far had lifted the major equity indices back near record levels through Wednesday despite lingering concerns that rising costs could weigh on corporate margins or be passed along to consumers, a development that could coax the Fed into a more aggressive policy paradigm to stave off inflation, according to recent remarks from some Fed officials. On Thursday, fed funds futures priced in a steeper path and continued look for a rate hike next September. The 2-year Treasury yield jumped 6.9 bps to 0.455%, its highest level since March 18, 2020. On March 15, 2020, the Fed announced it was cutting the fed funds rate by 100 bps to a range of 0.00% to 0.25% in response to the pandemic shock. The 5-year yield rose 7.4 bps Thursday to 1.24%, its highest mark since February 2020. An auction of 5-year TIPs securities was awarded at a record-low yield, driving 5-year TIPS-implied inflation expectations up sharply to 2.91%, the highest since March 2005. The 10-year Treasury yield rose 4.4 bps to 1.70%, within 4 bps of the pandemic peak from March of this year. TIPS-implied inflation expectations for the next ten years jumped to 2.65%, the highest level since September 2012. Despite those sharp moves, the S&P 500 staged a late-day rally to close 0.3% higher and at a new all-time high for the first time since September 2.

Global PMIs Point to Continued Headwinds: Global shares were generally improved Friday after the S&P 500 hit a record in the prior session as investors digested an influx of preliminary October PMIs for major economies. Japan’s Composite PMI, reflecting blended trends across manufacturing and services businesses, rose from 47.9 to 50.7, the first expansionary reading since April. The Eurozone’s preliminary Composite PMI, however, cooled from 56.2 to 54.3, a six-month low. The manufacturing index was relatively steady despite weakness in France while the services PMI was driven lower by a slowdown in Germany. Markit said in the release that “increasing supply bottlenecks and ongoing COVID-19 concerns” hurt growth and led to “survey-record price increases.” Apropos, 5-year inflation expectations based on Treasury securities extended their recent surge to 3.00% Friday, a record since at least 2004. The U.K.’s Composite PMI strengthened unexpectedly to a three-month high of 56.8, supported by stronger services activity but also a record increase in prices. U.K. consumer confidence fell to an eight-month low and retail sales excluding gasoline contracted unexpectedly and for a fifth month in September. U.S. equity futures and Treasury yields were mixed at 7:15 a.m. CT. S&P 500 futures had inched higher and signaled a record open while Nasdaq contracts declined 0.2%. The 2-year Treasury yield added 1.5 bps to 0.47% as the 10-year yield dipped 1.6 bps to 1.69%.


October Vining Sparks Economic and Interest Rate Projections, and Bloomberg Survey of Economists: Vining Sparks published the October economic and interest rate forecasts, which also includes the latest projections from a survey of Bloomberg economists. Click here to view the latest forecast.

Uncertainty but Apparent Progress in Democrats’ Economic Package Negotiations: President Biden said last night that he didn’t believe a corporate tax hike was in the cards as a funding option for the Democrat’s social spending package. Separately, Senator Sinema (D) indicated that she would support the funding proposal for the package, although it is unclear what the current funding proposal includes. Tax raisers being discussed include a corporate minimum tax,  raising the corporate rate to 26.5%, increasing the top individual rate to 39.6%, strengthening rules to tax U.S. company profits raised overseas, excise tax on stock buybacks, taxing unrealized gains.  A large part of the proposed funding appears to be tax savings from negotiating prescription prices for Medicare and Medicaid.  There continues to be significant uncertainty over the eventual scope of the spending package and the funding mechanism.

CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts

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