Treasury Selling Exhausted After September CPI?

  • The rebound in Treasury prices that began yesterday after the downdraft caused by the hot inflation numbers is continuing this morning. The 10yr note is currently up another 14/32nds in price to yield 3.88%. The 2yr is also up with the yield at 4.41%. That’s down from a high of 4.53% in early trading yesterday. The reversal in bond yields was also followed by stocks which after being down big on the heels of the CPI numbers reversed course and finished the day higher. We would like to say the sellers have been exhausted, but it could merely be a pause, so we’ll just leave it at that for now, but it is behavior that makes one take notice.

 

  • The UK can’t help itself and finds it’s in the news yet again. Kwasi Kwarteng has made history but for all the wrong reasons. Just this morning, the Chancellor of the Exchequer (akin to our Treasury Secretary) resigned, ending a fraught 38 days at the UK Treasury, the shortest stint in almost two centuries. It was his tax cut package that initiated the volatility in gilt prices and sent the pound tumbling towards parity with the dollar. Reading between the lines, it looks like the plan was so far out of mainstream market thinking that Kwarteng suffered a loss of trust with other government and market officials. So, the Kwarteng tenure comes to a short but eventful close.

 

  • The week ends with September retail sales, and they were mixed but should boost GDP estimates. Overall sales disappointed at 0.0% vs. 0.2% expected and August’s data was revised higher to 0.4% from 0.3%. Ex-auto and gas, however, sales outpaced estimates 0.3% vs. 0.2% forecasted and August was revised up to 0.6% from 0.3%. The so-called Control Group, a direct feed into GDP, rose 0.4% vs. 0.3% expected and August was revised higher to 0.2% from unchanged. Overall, the control group increase, and upward revisions, should be reflected in upwardly revised GDP estimates.

 

  • The current Bloomberg median consensus for third quarter GDP is 2.2% and the Atlanta Fed’s GDPNow is 2.89% and that should be revised even higher later this morning after the retail sales numbers. The first estimate of third quarter GDP is due on October 27th.

 

  • More Fed speak is on tap with three FOMC members speaking today (George, Cook, Waller), but perhaps the bigger news will come tomorrow when St. Louis Fed President James Bullard speaks at 1:15pm ET. Bullard has become the lead on discussing monetary policy so his speech will be viewed for any hints of a turn in policy. Given the hot CPI numbers we saw this week, it’s doubtful we see any relent on the hawkish rhetoric, but one can always hope. In between football games tomorrow it may warrant a brief look for headlines.

 

  • Later this morning, the University of Michigan Sentiment reading for October will be released. While consumer sentiment is expected to lift a tad, the bigger news for the Fed and the market will be the inflation expectations. In the 1yr time frame inflation expectations are expected to dip from 4.7% to 4.6%, while the 5-10yr inflation outlook is expected to lift a tad to 2.8% vs. 2.7%. While those expected moves are minimal the Fed will want to see the trend in both move lower and eventually to the 2% neighborhood.

Univ. of Michigan Consumer Inflation Expectations

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.27 5.32 5.32 5.32 5.33 5.79
0.50 5.26 5.29 5.21 5.21 5.19 5.67
1.00 5.26 5.26 5.16 5.16 5.09 5.54
2.00 5.25 5.09 5.09 4.98 NA
3.00 5.04 4.91 NA
4.00 4.86 NA
5.00 4.83 NA
10.00 NA

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Published: 10/14/22 Author: Thomas R. Fitzgerald