The Market Today

Treasury Yields Surged Thursday in the Wake of Fed’s Taper Signal, Contemplation of Quicker Liftoff


by Craig Dismuke, Dudley Carter

TODAY’S ECONOMIC DATA

New Home Sales Expected to Inch Higher Again in August: New home sales (9:00 a.m. CT) are expected to increase 1.0% in August after falling 19% (change in seasonally adjusted annualized levels) over the previous four months.

Fedspeak: Following the Fed’s policy decision Wednesday, there are six officials on the tape today.  Already this morning, Cleveland Bank President Mester, who will vote on policy beginning in January, said the risks of higher inflation outweigh the risks of lower inflation and that she expects the conditions required for a rate increase to be satisfied late in 2022. While she expects inflation to run somewhat above 2% for a couple of years, the Fed’s policy rate will need to remain accommodative for some time. Mester said she supports kicking off the taper process in November and completing it by the middle of 2022. Fed Chair Powell, Vice Chair Clarida, and Governor Bowman will host a Fed Listens event at 9:00 a.m.  Kansas City Bank President George (9:05 a.m., 2022 voter) and Atlanta Bank President Bostic (11:00 a.m., 2021 voter) are also slated to speak.


YESTERDAY’S ECONOMIC NEWS

PMIs Point to Further Slowing, Persistent Supply Issues in September: Economic activity continued to cool in September and by more than expected based on the preliminary Markit PMIs released on Thursday. While the slowing was evident in both the manufacturing and services sectors, the latter has seen a more severe slowdown over the last several months. The manufacturing PMI dropped from 61.1 to 60.5, below the 61.0 expected and a five-month low but in proximity to July’s recent high. The services PMI, however, fell for a fourth month to a 14-month low. Indications of persistent supply-side issues (e.g. supply-chain bottlenecks, materials and worker shortages) driving prices higher remained pervasive throughout the report.The pace of US economic growth cooled further in September, …reflecting a combination of peaking demand, supply chain delays and labour shortages,” the report said, noting “The upshot is yet another month of sharply rising prices charged for goods and services as demand outpaces supply, and higher costs are passed on to customers.”

Kansas City Fed Index Points to Softer September: The Kansas City Fed’s activity index fell more than expected in September to an eight-month low. The results countered a more encouraging message from a couple of previously released regional Fed surveys that showed some recovery of activity this month after an August slowdown. Details showed a broadly weaker current assessment but a bit stronger of an outlook six months ahead, with production, orders, and shipments all expected to pick-up. Less encouraging, prices paid for raw materials and received for finished goods were also expected to increase further.

Household Net Worth Hits New Record: Household net worth rose $5.8 trillion in the second quarter to a new all-time high on further appreciation of real estate values, higher replacement costs for durable goods, and another strong quarter of equity performance. Combined with other changes, those factors helped drive total asset valuations up $6.2 trillion last quarter. The ratio of household net worth to total assets rose from 698% to 786%. Total liabilities grew by $347 billion, with $223 billion of the quarterly change tied to rising mortgage balances. Overall, the 2% quarterly increase in liabilities was the strongest since 2007. Household liabilities as a percent of assets declined from 11.3% to 11.1%.


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TRADING ACTIVITY

Stocks Rose Despite Treasury Yield Surge in the Wake of the Fed: The S&P 500 rallied sharply Thursday even as medium and longer Treasury yields surged following the Fed’s Wednesday announcement that tapering may be appropriate as soon as November with a rate hike possible as early as late next year. Stronger inflation pressures amid persistent supply chain issues and worker shortages appeared to be the key driver of changes in the Fed’s outlook. Those dynamics were also a key factor at play in the Bank of England’s hawkish decision earlier Thursday. The U.K. central bank said the inflationary dynamics had strengthened “the case for modest tightening over the forecast horizon.” Although the U.K.’s 10-year yield held a wide lead early over increases in other sovereign yields, longer Treasury yields quickly closed the gap. Following the 10.9-bp increase for the U.K. 10-year yield, the 10-year Treasury yield ended 13.0 bps higher at 1.43%, its largest jump since February and highest level since July 1. One notable difference, however, were responses to possible central bank rate increases by shorter maturities. While the U.K.’s 2-year yield surged 10.4 bps to 0.38%, the 2-year Treasury yield rose just 2.5 bps to 0.26%, less than 1 bp shy of its highest level since March 2020. Asked to predict equities’ response, most might have expected soaring yields to spook the stock market, particularly considering the broader inflation concerns. However, the S&P 500 rallied 1.2% on broad sector support, splitting a 1.0% gain for the Nasdaq and a 1.5% improvement for the Dow. Outside of the March 2020 market mayhem, the last time such a large jump in the 10-year yield (+14.8 bps) was matched with such a strong rally for the S&P 500 (+1.3%) was November 2013.

Considering the intensity of yesterday’s moves in U.S. markets, it isn’t too surprising to see stocks and Treasury yields dip overnight. At 7 a.m. CT, U.S. equity futures were down between 0.4% and 0.6%, the 2-year Treasury yield was 0.3 bps lower at 0.26%, and the 10-year yield had declined 1.2 bps to 1.42%. Equity weakness was consistent with moves in Asia and Europe while the drop in yield stood in contrast to further increases in Europe. Italy’s 10-year yield was 6.8 bps higher at 0.79%, a high since early July, after consumer confidence climbed to a new record and broader economic sentiment stepped down but remained near record levels. Germany’s 10-year yield rose 2.9 bps to -0.23%, also its highest level since early July, despite business confidence slipping for a third month in September. A current assessment remained close to the post-pandemic peak.


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