Morning Notes — Inflation, Bond Yields and the SPX Outlook

Today’s data will lead to increased weekend reports of rising inflation expectations.  But since January 3, inflation expectations as measured by 10-year breakeven yields have declined from ~2.65% to ~2.39% today.  The timing of the decline may follow Fed policy changes, but it also follows recent ISM details that suggests easing supply bottleneck pressures. A higher new orders number and lower inventory number suggests increased future goods price inflation.  That was the case for months, until this week’s release of January ISM manufacturing revealed a sharp reversal in new orders relative to inventories. January’s new orders/inventory convergence fits our expectation for decelerating goods price inflation, while today’s higher wage number suggests the deceleration will have limits. Taken together, the data supports an elevated but manageable inflation narrative with a durable economic recovery and higher bond yields.