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?

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.