Inside Markets — Historical High

Ten-year real yields (nominal yield – inflation expectations) are at an historical high of +225bp. Think of real yields as the premium that investors demand over inflation. US real yields could move higher but are far more likely to decline given they already sit at all-time highs.  A decline from current levels would require lower nominal bond yields or higher inflation expectations.

Yesterday’s April flash PMI data suggest that inflation pressures may be in the process of easing.  The text from survey provider S&P included: ‘The deterioration of demand and cooling of the labor market fed through to lower price pressures, as April saw a welcome easing in rates of increase for selling prices for both goods and services. Notably, the drivers of inflation have changed. Manufacturing has now registered the steeper rate of price increases in three of the past four months, with factory cost pressures intensifying in April amid higher raw material and fuel prices, contrasting with the wage related services-led price pressures seen throughout much of 2023.’  This commentary represents a 180 degree turn from the January, February and March PMI reports that correlated with hotter-than-expected CPI prints. PMI data is usually the most reliable leading economic data available and the April report is something to note as we head into April CPI due on May 15.

An all-time high in real yields and potential near-term peak in inflation expectations argue in favor of adding bond duration at current levels.

We stay with our near-term tactically bearish outlook unless/until the SPX breaks above 5119.  Mega-cap Tech earnings (today/tomorrow) and Friday’s March PCE print are significant catalysts.