Baker Market Update – wk211119

The US Treasury market saw a rebound this week with yields drifting slightly lower across the curve. After some upward pressure from last week’s 30yr high on headline inflation print (CPI=6.2%) rates settled back down approximately 5 to 10 basis points as the market continues to digest recent economic data as well as the timing of the Federal Open Market Committee’s first-rate hike since 2018. After peaking at 1.70% about a month ago, the 10Yr Treasury yield currently sits at 1.54%. Equities markets saw small increases as the S&P 500 continues to notch all-time highs and oil fell off a little bit down from $80 to $76 with a recent high of $84.65 late October.

On Tuesday, the October US Retail Sales report was released, indicating strong results. The release showed a 1.7% month over month increase which was the biggest in increase retail spending since March and the third straight month of increases. The broad gain in spending continues to illustrate that elevated savings and rising wages have helped Americans continue to purchase merchandise and anchor economic growth. Also released on Tuesday was Industrial production showing a 1.6% month over month increase further reinforcing that economic activity is strengthening. However rising inflation starting to flow into consumer sentiment and could be a headwind to these figures in the coming months.

It was a busy week in Washington. On Monday, President Biden signed the $1 trillion dollar bi-partisan infrastructure bill into law. Next on his agenda is the $1.64 trillion economic plan which saw the non-partisan Congressional Budget Office (CBO) indicate it would add $367 billion to the Federal Budget deficit over the next decade. In spite of the data from the CBO and the eight and half hour-long speech by House Minority Leader Kevin McCarthy the bill passed the House and is expected to be voted in the Senate early December.

Turing to the Federal Reserve, it is becoming apparent that Chairman Powell’s path to reappointment is not a certainty given the current landscape. Recent activity in betting markets is indicating about a 60% chance of Senate confirmation while current Federal Reserve Board Governor Lael Brainard is approximately 40%. Democratic Senator Joe Manchin has spoken to or plans to talk with both candidates and provide his feedback to President Biden. Senate Banking Chairman Sherrod Brown said this week that either candidate President Biden should elect will have a smooth approval process within the Senate.

Next week there are a few of data points to watch with the shortened Thanksgiving holiday week. Durable goods orders are expected to decline slightly due to a drop in the more volatile items in the headline figure (aircrafts). Personal income and spending data for October will also come out which are expected to show lower nominal incomes given the recent inflation increases. The FOMC minutes from their November meeting will be released and investors will look into the dovish tone and continued use of “largely transitory” with the inflation language.

It is looking very likely that inflation will remain elevated out until early next year. While it is not clear on the short-term impact to growth, typically it will boost growth short term before dragging on it on a long-term basis.

Chart from Bloomberg Economics

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