WILL THE CPI BE HIGHER THAN THE ENTIRE TREASURY SPECTRUM?

Bond prices have rallied nominally off last week’s lows as the 10-year has slipped in yield by about 10 basis points.  Some are questioning why the advance as the data is convincingly strong.  I believe it is for a myriad of reasons.  First nothing ever moves linear.  There is always backing and filling.  Second the Fed is continuing to make reassuring commentary.  Third lack of supply.  Fourth the lack of inflationary data.

Will the environment change next week?  There is the resumption of Treasury issuance as the three-year, 10-year and 30-year will be auctioned.  Will the curve steepen in the face of increased supply?

Perhaps just as important as the auctions, March CPI is released.  The data is likely to push inflation above the entire term structure of the Treasury yield curve, a very rare occurrence.

Price stability has been a Fed dictum for almost forever.  We have had price stability for the last 12 years and many are bemoaning such.  Wage increases are tied to some inflationary index and if prices are flat, automatic wage increases based on inflation will also be flat.

Bloomberg writes the economy has not experienced a CPI reading two standard deviations above or below the 10-year average inflation rate since 2009, the third longest streak over the last 120 years.  The last such occurrence when there were so few inflation observations of more than one standard deviations from the average was the 1950s and 1960s, the last era when low cost providers entered the global system.

As noted above, next week the CPI is released and the headline rate is expected to be 0.9 standard deviations above the 20-year average.  Treasury yields across the entire spectrum will be below the inflation rate across the entire spectrum, a third standard deviation event.

Historically when such occurs, Treasuries rise in yields and equities decline anywhere from 5% to 20%, depending upon the depth of the decline in Treasury prices.

Many believe (hoping) the Fed’s inflation forecast is accurate and such increases are indeed transitory for if they are not history suggests volatility will sharply rise.

Commenting about yesterday’s market activity, the NASDAQ rose about 0.9% and the Dow was flat on the FRB Chair’s reassuring inflation remarks.  Treasury prices were moderately higher, a possible catalyst for the NASDAQ advance.

Last night the foreign markets were mixed.  London was down 0.13%, Paris up 0.24% and Frankfurt up 0.07%.  China was down 0.92%, Japan up 0.20% and Hang Seng down 1.07%.

The Dow should open mixed ahead of the PPI.  The 10-year is off 12/32 to yield 1.67%.

 

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