04 Mar INFLATIONARY EXPECTATIONS ARE AT THE HIGHEST LEVEL SINCE 2008
Price stability and maximum employment is the dual but conflicting mandate of the Federal Reserve. Few market participants have experienced the ravages of inflation and the decimation that has occurred in the bond market when it was perceived the Fed was behind the proverbial inflationary curve.
Today this is a gargantuan issue given the incredibly low Treasury rates and exploding federal deficit amplified by near record high valuation for the S & P 500 and strong probability of both demand pull (product) and cost push (wage) inflation.
Yesterday market implied inflation expectations—with five-year expectations—topped 2.5% for the first time since 2008. In my view this is huge especially given expected Fed policy that it intends to keep the overnight rate at 0.00% through 2023.
Longer dated Treasuries sold off and as per Bloomberg the 30-year Treasury is now posting about a 14% annualized decline since the start of the year. Bloomberg writes bonds rated A or higher are experiencing their worst start of the year since 1980.
Yesterday’s selloff occurred even as the released data was not as strong as expected. I must note the pricing data in the ISM non-manufacturing index jumped to the highest levels since 2008. Wow! This is ugly.
This ugliness was not lost on the NASDAQ as the index tumbled about 2.8%. As noted a many time, the NASDAQ is the index most sensitive to an increase in interest rates, partially the result that it is trading near a record 70x earnings. The S & P was off about 1.2% and the Dow off only 0.29%.
Oil jumped about 2%, the result of a record drop in domestic fuel inventories, the result of the deep freeze two weeks ago.
What will happen today? Tomorrow is the release of the all-inclusive BLS Employment report. How will this pivotal release influence perceptions?
Last night the foreign markets were down. London was down 1.01%, Paris down 0.25% and Frankfurt down 0.49%. China was down 2.05% Japan down 2.12% and Hang Seng down 2.15%.
The Dow should open flat. The NASDAQ is again under pressure as futures are down about 1%. The 10-year is up 5/32 to yield 1.46%. FRB Chair Powell appears on a WSJ webinar this morning. Will he make any market moving comments?