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Peak Inflation View Has Rebound Effort in Play

Posted October 14, 2021
Patrick J. O’Hare

The stock market didn’t make a big move yesterday, but the Treasury market did, and that move is making a difference this morning along with some better than expected earnings news.

Briefly, after hearing that total CPI was up 5.4% year-over-year in September and that core CPI was up 4.0%, longer-dated Treasury securities rallied. That is, prices went up and yields went down. That wasn’t the first move. The first move was some knee-jerk selling, yet the selling ended almost as quickly as it began.

On a day when it was clear consumer inflation is still running hot, and the FOMC Minutes effectively conveyed that a tapering of Treasury and agency mortgage-backed securities will be starting soon, the 10-yr note yield declined three basis points to 1.55% and the 30-yr bond yield dropped seven basis points to 2.04%.

The implication of those moves is that there was an allowance yesterday for the idea that consumer inflation may be at, or very near, a peak. Accordingly, the trading focus wasn’t on the clearly high inflation prints so much as it was on the expectation that inflation rates could be moderating in coming months.

The unexpected reaction following the high inflation prints presumably fostered some short-covering activity that contributed to the drop in yields. In any case, that drop in yields afforded some relative strength to the growth stocks that is bleeding over into today.

Currently, the S&P 500 futures are up 40 points and are trading 1.1% above fair value, the Nasdaq 100 futures are up 156 points and are trading 1.2% above fair value, and the Dow Jones Industrial Average futures are up  289 points and are trading 1.2% above fair value.

Today, however, it is more of a family affair. There is also some strength expected in the value/cyclical stocks.

Better than expected earnings news from, well, just about every company that reported has helped things along. Bank of America (BAC)Morgan Stanley (MS)Taiwan Semi (TSM)Walgreens Boots Alliance (WBA)UnitedHealth Group (UNH), and Citigroup (C) are among the luminaries that beat expectations.

In addition, the latest weekly initial claims report was the best since March 14, 2020. Initial claims for the week ending October 9 decreased by 36,000 to 293,000 ( consensus 332,000). Continuing claims for the week ending October 2 decreased by 134,000 to 2.593 million, which was also the lowest since March 14, 2020.

The key takeaway from the report is that the claims figures are moving in the manner and direction they should be moving given the recurring refrain of labor shortages and the recurring reports showing that there are more than 10 million job openings.

Separately, the Producer Price Index for September was a bit softer than expected. The index for final demand increased 0.5% month-over-month ( consensus +0.6%) and the index for final demand, less foods and energy, increased 0.2% ( consensus +0.5%).

On a year-over-year basis, the index for final demand was up 8.6%, versus 8.3% in August. That is the largest advance since the 12-month data were first calculated in November 2010. The index for final demand, less foods and energy, was up 6.8%, versus 6.7% in August.

The key takeaway from the report is in the Treasury market’s initial response, which is muted and indicative once again that market participants are sniffing peak inflation. The 10-yr note yield is down two basis points to 1.53% (which is where it was just prior to the release).

Stock market participants for their part are seeing a rebound opportunity.

Originally Posted on October 14, 2021 – Peak Inflation View Has Rebound Effort in Play

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