It’s Friday the 13th in the year 2020, so what can possibly go wrong today? Just giving you fare warning to keep your eyes open and your head up. From the market’s perspective it’s become somewhat bi-polar in trading around positive vaccine news one day with a risk-on rally only to be reminded of record-breaking case counts and hospitalizations the next day with a more sober tone that benefits Treasuries. And while economic numbers take a clear backseat to virus news right now we did see some soft CPI numbers for October yesterday and that will put wind in the sails for Treasuries, and allow the Fed plenty of room to continue with full-on monetary accommodation. Core CPI was flat for the month and rose 1.6% year-over-year versus 1.7% expected and a level that had held for the prior two months (more on CPI below). Finally, we wanted to highlight our latest podcast where we talk investment portfolio management and strategy in this post-election environment. We discuss these topics with Nathan Goodnight and Greg Rains from CenterState’s Capital Markets division. Be sure to give it a listen for some thoughts and ideas as you begin planning for 2021. The itunes link can be found here and the Spotify link here.
As we mentioned above, the Treasury market has been trading around the daily outlook for virus trends and vaccine news rather than any one economic report. The election was another element in the calculus but the market has moved largely past that acknowledging a Biden win and a Senate remaining in Republican hands, despite the twin run-off races in Georgia that will ultimately determine that. That vote is not until January 5 so markets have plenty of time to revisit the issue if polls start to swing one way. We mention polls cautiously knowing full well their questionable accuracy of late, and a run-off election where turnout will be key makes it even harder to predict with any precision. That will be an issue for late December trading but not for now.
The back up in Treasury yields seems to have lost its momentum and that could mean that, although we may not rally down to range low yields, running through 1% and breaking above the range we’ve held since March may be tough as well. Even with long-end Treasury supply this week, and positive vaccine news, yields have held below range highs as plenty of money flowed into Treasuries from the Asian market. The following graph, courtesy of Citigroup, shows how the 2yr-10yr curve has steepened thanks to higher 10yr yields, (top panel), but it’s hitting resistance that has held two times previously, while momentum (lower panel) seems to have peaked. Pushing yields higher at this time will be a tall task.
October CPI Shows Inflation Risk Remains Low
Inflation has been mentioned as a latent threat given all the stimulus initially provided to the economy and monetary accommodation provided by the Fed, but with the fate of a second stimulus package still uncertain that influence should start to dissipate and the October CPI Report printed some pretty docile numbers. Overall CPI was flat for the month versus a 0.1% consensus and 0.2% gain in September. The core rate (ex-food and energy) also missed expectations coming in flat as well versus 0.2% consensus and 0.2% in September.
On a year-over-year basis, overall CPI dipped to 1.2% after last month’s 1.4% result and was below the 1.3% forecast. Core CPI was 1.6% after two straight months at 1.7%. With docile monthly and year-over-year numbers, inflation may be something to expect at some point but that will be a mid-to-late 2021 story, if not later. And with the Fed’s New Monetary Policy Framework, if core CPI does climb over 2% the Fed is likely to let it be for some time. So if you’re expecting inflation to force the Fed’s hand it might take quite some time for that to come to fruition.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||Unch||1 Mo LIBOR||0.14%||+0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.306%|
|6 Month||0.10%||+0.01%||3 Mo LIBOR||0.22%||+0.01%||Prime Rate||3.25%||5 Year||0.456%|
|2 Year||0.17%||+0.02%||6 Mo LIBOR||0.25%||+0.01%||IOER||0.10%||10 Year||0.877%|
|10 Year||0.88%||+0.06%||12 Mo LIBOR||0.34%||+0.01%||SOFR||0.07%|