It was a busy week for financial markets as Federal Reserve Chairman Jerome Powell gave his semi-annual “Humphrey Hawkins” testimony in consecutive days to both houses of congress. The economic data was plentiful and included eye-popping consumer price data for the month of June. The behavior of the bond market, however, seemed to reinforce the Fed’s view that the inflation we’re seeing today, no matter how stunning, will not last. The yield on the benchmark 10yr Treasury fell slightly after release of the consumer price index (CPI), and remained below 1.40% as we approached end-of-week.
The CPI report was striking indeed as the core number jumped 4.5% YOY, the highest reading since 1991. Details of the report, however, revealed that a small number of components most directly impacted by post-COVID economic reopening accounted for most of the jump. In fact, the inflation rate for 90% of the components remains at or near the Feds 2% target. That reality, combined with the baseline effect of dreadfully low inflation numbers from the early weeks of the pandemic shutdown last year caused the outsized increase, and markets exhibited clear understanding of that.
Meanwhile, the Fed Chairman entered the lion’s den of congressional testimony Wednesday and Thursday where a few thoughtful questioners alternated with blowhards who gave speeches disguised as questions. Powell stuck to the script and explained that the Fed wouldn’t hesitate to use their tools to crush any signs of sustained inflation or expectations thereof. He explained repeatedly that the sharp price increases were caused by the above-mentioned “baseline effects” which conspired with temporary production bottlenecks and supply constraints along with a surge in demand as the economy reopens.
Overall, in his two days of testimony markets showed less concern about inflation fears than about the rising tide of Treasury supply that is hitting the market. The auction of $24 billion 30yr Treasury Bonds on Wednesday was not well received, and those results caused some afternoon indigestion as yields popped higher. That backup didn’t last long, and by Friday morning yields were again flirting with the lowest levels seen since February.
Other economic news included a couple of regional Fed reports which gave mixed signals. From New York, the Empire Manufacturing Index leaped to 43% from a prior reading of 17.4%, while the Philly Fed Index dropped from 30.7% to 21.9%. Retail Sales data for the month were also mixed. The headline number was up 0.6%, a touch stronger than expected, while the core (control group) number bounced a healthy 1.1% after a downdraft the prior month. And finally, a big drop in the University of Michigan consumer confidence index to a five-month low of 80.8% in July despite an acceleration of employment growth and continued resilience of the stock market. That transitory jump inflation is clearly causing a transitory drop in confidence. It would sure be nice to know when we can transition away from all of this “transitory” stuff. Wish the Fed would tell us that.
US Treasury Yield Curves: March 31st and Today
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