WILL THE CARNAGE CONTINUE IN THE SHORT END OF THE TREASURY MARKET

The realization that the Fed is considerably behind the curve has hit the markets hard.  The two-year Treasury is now yielding 2.75%.  On March 1st   the 2-year was yielding 1.25%.  Wow!

The markets have now fully discounted 200 basis points of tightening by September which implies several half point hikes in the immediacy, the last of which was May 2000.  Furthermore, according to swaps, the Fed Funds rate is expected to be  2.75% by next May or June.

Late last week a debate commenced of a more aggressive 75 basis points increase at the May Fed meeting, the result of comment made by St. Louis Fed President Bullard.  As noted, the markets have already discounted an aggressive Fed so such a statement is nothing other than officials catching up with market perceptions.

Later this week initial estimates of first quarter GDP is released. Consensus is expecting the economy to grow by 1.0%.  The GDP Price Index is expected to increase by 7.2% and the core PCE to rise by 5.6%.

Several times I have commented about the possibility of Boomflation…strong growth and strong inflation.  What are the odds nominal GDP rises by 10% and PCE rise by 9% resulting in 1% real GDP?

Many times, I have referenced a dated St. Louis Fed report that suggested if monetary velocity accelerates to 50% of its norm both growth and inflation would be in the double digits.   Many developing nations have experienced such an environment, but it is rare experience in an industrialized economy.

What will happen this week.  Earnings season accelerates this week.  Several mega size technology companies post results including Apple, Google, Meta and Amazon.  To write the obvious any surprises can have an outsize impact.

Bloomberg writes the NASDAQ 100 is on track for its worst month since 2008, primarily the result of a selloff in short dated Treasuries and a high profile earnings disappointment.

The economic calendar is comprised of various manufacturing statistics, housing data and a sentiment survey and initial estimates of first quarter GDP.

Last night the foreign markets were down London was down 2.10%, Paris down 2.28% and Frankfurt down 1.66%.  China was down 5.13%, Japan down 1.90% and Hang Seng down 3.72%.

Futures are down about 1% on China’s worsening COVID outbreak compounded by fears of by faster Federal Reserve tightening.  The 10-year is up 16/32 to yield 2.87% and the two year is now yielding 2.64%.  Oil is off about 4%.

 

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