Morning Notes — Yields Lower/Curve Flatter
The S&P 500 (SPX) closed last week at a record high after seven consecutive days of gains added +2.6%.
The S&P 500 (SPX) closed last week at a record high after seven consecutive days of gains added +2.6%.
Longer-dated bonds (10+ years) have declined since the spike in US April CPI data on concerns for a Fed policy mistake.
Bond yields move lower and the yield curves flattens late in an economic cycle. But late cycle dynamics also include lower commodity prices, specifically for industrial metals and crude oil.
The recent advance in the Nasdaq 100 (NDX) to ~14,550 has exceeded pattern objectives of ~14,400, driven largely by a flattening of the Treasury yield curve.
Consensus for Friday’s release of June Non-farm payrolls ticks higher to +700,000 from +685,000 yesterday.
Global economic growth in the first half of the year will probably come in up +4.6%, which is a full 2 percentage points higher than consensus forecasts at the beginning of the year.
Headline and core May PCE (Fed’s favorite inflation gauge) fell short of expectations on a month-over-month basis, up +0.4% and up +0.5%, respectively vs. consensus for +0.5% and +0.6%.
Optimism for a bipartisan/White House infrastructure package could be premature, but the headlines return markets to the ‘inflation/Fed policy mistake’ narrative.
Last Wednesday’s Summary of Economic Projections from the FOMC included only small upside revisions to inflation forecasts, while the median dot pulled two rate hikes forward to 2023.
Yesterday’s backup in bond yields resulted in value (SVX) outperforming growth (SGX) by 99bps. Conditions for a systematic reversal in yields started about 7 days ago when the 10-year Treasury price put/call ratio reached extreme overbought levels.