The Market Today
One Month of Hotter Inflation Data Does Not a Trend Make; But Is Enough to Send Skittish Yields Higher
by Craig Dismuke, Dudley Carter
Another Firmer Inflation Reading for Bonds to Digest: After yesterday’s surprisingly strong inflation report and weak retail sales data, today’s calendar is loaded with reports of secondary importance. Initial jobless claims for the week ending February 10 rose from 223k to 230k, remaining extremely low. The regional Fed manufacturing reports, from the New York and Philadelphia Fed banks, were mixed for the month of February but remained at a strong level cumulatively. The Philadelphia Fed’s regional manufacturing report beat expectations, rising from 22.2 to 25.8 on stronger new orders and number of employees. The New York Fed’s index fell from 17.7 to 13.1 but also included increases in the new orders and number-of-employees indices. Tying those two surveys to the topic du jour, both reported the highest inflation-proxy prices paid index in at least six years. Like yesterday’s CPI inflation report, the January Producer Price Index was hotter-than-expected, rising 0.4% MoM at the core level and bringing the YoY rate up to 2.2% (exp. +0.2%, +2.0%). Also like yesterday’s CPI data, the PPI data was boosted by stronger price pressure for apparel retailing and medical care items, specifically hospital outpatient care prices which rose 1%. At 8:15 a.m. CT, the January Industrial production and Capacity Utilization reports are scheduled for released. At 9:00 a.m. CT, the February homebuilder confidence index is expected to hold at an extremely strong reading of 72.
Growing Likelihood of FOMC Targeting Four Hikes in 2018: Given the stronger-than-expected earnings data from three weeks ago and this week’s stronger-than-expected readings on CPI and PPI inflation, investors will continue to worry about the risks of faster inflation and, thus, a faster pace of rate hikes from the FOMC. While the data would need to be sustained, the risks to the Fed targeting four rate hikes in 2018 rather than three are increasing. They will get the benefit of another round of data before their March 21 FOMC meeting.
Yesterday – Bond Yields Jump As Hot CPI Report Restoked Fears of Inflation, Faster Fed Hikes: The knee-jerk market responses to January’s firmer-than-expected CPI report proved mixed as an indicator for the ultimate daily changes across asset classes. The core CPI index was reported up 0.349% MoM in January, the biggest monthly jump since 2005, and a firmer 1.82% YoY, previously 1.78%. Immediately afterwards, yields spiked with the U.S. Dollar and U.S. equity futures sank. The report seemed to strike the same nerve that was pinched on February 2 by a big increase in hourly earnings which set off a painful few days of market volatility. By Wednesday’s close, the higher rates held. In fact, the initial jump was added onto by the end of trading and pushed Treasury yields to their highest levels in years. The 2-year yield rose 6.0 bps to 2.16%, its highest level since September 2008. The overnight rate for year-end 2018 implied in Fed funds futures also rose and has now completely erased the damage done by last week’s volatility; closing pricing levels implied two 2018 hikes and a nearly 80% chance of a third. The 5-year yield jumped the most, tacking on 9.0 bps to 2.63%, a new high since April 2010. The 10-year yield climbed 7.3 bps to 2.92%, its highest level since January 2014. Compared with yields, equities and the Dollar were less sticky. Equities, led by financials, recovered from early selling to finish up more than 1% and at their highest levels of the day. The Dollar reversed lower, tumbling 0.7% and to its second lowest level since December 2014.
Overnight – Equities Fear Inflation and Higher Rates? Not This week… : Higher rates, which caused quite the disruption in equity markets less than two weeks ago, have surprisingly proven to be less than a mere distraction over the last 24 hours. After divergent initial responses to firmer U.S. core inflation – equities sold off and yields spiked – equities reversed and both have trended higher. The Treasury curve is up again overnight and has replaced yesterday’s multi-year highs with new levels across the curve. The 2-year yield is up 2.9 bps to 2.19% after earlier touching 2.21%. The 5-year yield is 2.4 bps higher at 2.66%, down from an overnight high of 2.68%. The 10-year yield has risen 1.3 bps to 2.92%, below its session top of 2.94%, and ever so closer to the psychological 3.00%. Those moves were not uncommon for Thursday. In Germany the 10-year yield added 2.4 bps to 0.78%, its highest mark since September 2015. In France, where data showed the mainland unemployment rate dropped to a new cycle-low 8.6% in 4Q17, the 10-year yield is also up 2.4 bps to 1.02%, the most yield since March 2017. But instead of a presumed selling off, global equities have responded with a notable firming. That global strength has translated to futures moving up more than 0.5%. The Dollar, however, continued its soft streak and is hovering just a tick or two away from its weakest level since 2014.