Author: jsc

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.

Last week’s apparent hawkish Fed pivot had bond prices reaching further into extreme overbought territory, but yields still held support, loosely defined at ~1.45%.

The Fed’s updated dot plot on Wednesday just moved closer to what markets have been signaling in OIS (overnight swaps) forward rates for months.

Bond yields reflect market expectations of future rates of inflation or growth.  Higher future bond yields tend to lead cyclical equity sector (Industrials, Financials, Materials, Energy) outperformance.

This week’s weaker guidance from JPM and C may set the stage for an oversold reversal as Fed stress test results in ‘late June’ should act as a clearing event for large cap banks to accelerate buyback plans.

Ten-year yields are trying to break through their 100-day moving average at 1.50%. The month-long rally in Treasuries (yields lower) was almost entirely driven by technical factors, rather than growth fundamentals.

The next major event on the catalyst calendar is Wednesday’s FOMC meeting.  Markets are almost entirely focused on a possible tapering message, but the meeting also includes an updated dot plot (member expectations for future rate hikes).