11 Aug CPI AT 8:30
Yesterday I rhetorically asked whether reality will return to the bond market with a vengeance. At the time of this writing the 10-year Treasury is yielding 1.37% up from 1.12% five days ago. The benchmark violated its 200-day moving average late Monday and is on the verge of violating the 50-day moving average of 1.38%.
It is thought that if the upcoming inflation data is stronger than expected a breach of the 100-day moving average of 1.50% is all but inevitable.
Many times, I have commented about the velocity of change and Bloomberg opined yesterday the 4-day 26 basis points move on the 10-year Treasury on a percentage basis ranks in the top ten fastest times of the last five years.
Treasury market entered its first bear market since 1980, defined as a 20% drop in prices. Yields on the 10 year rose about 60 basis points. With yields so low, it does not take much to create a bear market.
Bloomberg stated that because of the rise in yields which sent popular Treasury ETFs and investment grade ETFs down approximately 23% and 21% during the first quarter, the typical 60/40 portfolio was posting a 14% decline. Such declines have been reversed by the end of the second quarter.
As remarked above, several inflationary indicators are released this week. Today the CPI is posted at 8:30. Analysts are expecting a 0.5% and 0.4% increase for the overall and core level, respectively, down considerably from last month’s reading of 0.9%.
A major issue at hand is OER or what someone thinks they can rent their home if it was indeed rental. Recent Fed data is suggesting OER could be rising at a multidecade high of 9%. If this is indeed the case and given that OER is about 30% of inflationary indices, the argument inflation using the CPI is not transitory gains credence. Moreover, the argument regarding the un anchoring of inflation and inflationary expectations also strengthens.
A brief history lesson…OER plunged following 2008-09 was flat for many years and only recently began a gradual rise. It was major “technical reason” as to why inflationary expectations have been “well anchored” even though most rank and file people thought the opposite.
Last night the foreign markets were up. London was up 0.52%, Paris up 0.31% and Frankfurt up 0.05%. China was up 0.08%, Japan up 0.65% and Hang Seng up 0.20%.
The Dow should open flat but this could change dramatically given the potential significance of the 8:30 inflation data. Oil is down about 1% following the Administration’s demand that OPEC increase production to stem the rise in gas prices. The 10-year is off 5/32 to yield 1.39%.