Global Inflation Worries have Treasuries under Pressure

  • While a China-led global slowdown led to higher Treasury prices on Monday, today it’s higher UK inflation that has Treasury yields heading higher.


  • In a reminder that inflation is not only a domestic story but a global one, UK inflation accelerated to the highest level in 40 years with their CPI increasing 10.1% YoY in July. That follows a 9.4% gain the month before. Gains in food prices were the biggest culprit despite a bit of a reprieve in the energy complex. UK investors have priced in a 50bps rate hike for the next BoE meeting and 200bps of rate hikes to 3.75% by next May.


  • In addition, the Central Bank of New Zealand increased their overnight rate by 50bps to 4%, and a Bank of Canada official reiterated a Fed-like response that “our job is not done yet” after their CPI decelerated to 7.6% in July. So, the synchronized global tightening campaign continues in full force.


  • The Fed’s minutes from the July meeting will be released this afternoon but don’t expect a dovish pivot. The meeting came before the cooler July CPI report and as such the minutes are likely to be populated with hawkish rhetoric with little hint of a change in tone. That may unnerve stocks a bit and create some fixed income volatility even though the hawkish expectation is widely anticipated.


  • All the overseas news had Treasuries under pressure before July retail sales numbers were released and they have held most of that early selling after a decent retail sales report.


  • Retail sales came in flat vs. 0.1% expected and the prior month was revised lower from 1.0% to 0.8%. That may look disappointing but when accounting for inflation being flat in July vs. up 1.1% in June, the July numbers were better after adjusting for inflation.


  • Also, the flat sales in July were mainly attributable to lower gas prices as well as a drop in volume sold. Ex auto and gas, sales totaled a more impressive 0.7% increase vs. 0.4% expected. The Control Group reading (a direct feed into GDP) was up 0.8% vs. 0.6% expected and 0.7% in June. And again, after adjusting for inflation the July numbers look even better.


  • Overall, the sales report looks solid as consumers seem to have shifted some of the savings from lower gas prices to other purchases, including goods, which take a sizeable share of the retail sales report.  With two-thirds of the economy tied to the consumer, their spending will be critical to a solid GDP number. Bloomberg estimates third quarter GDP at 1.5% while the Atlanta Fed’s GDPNow estimate is for 1.8% growth.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.35 3.35 3.31 3.32 3.42 3.88
0.50 3.33 3.32 3.25 3.21 3.27 3.77
1.00 3.33 3.29 3.21 3.16 3.18 3.64
2.00 3.27 3.16 3.09 3.07 NA
3.00 3.04 3.00 NA
4.00 2.96 NA
5.00 2.92 NA
10.00 NA

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Published: 08/17/22 Author: Thomas R. Fitzgerald