The bond market will be closed in the US on Monday, but this week will be all about whether and to what extent yields continue to rise.
Last week, rampant optimism around the burgeoning “Phase One” trade deal between the US and China helped precipitate a fairly dramatic bond rout. By the end of the week, yields were sharply higher and the popular long-bond ETF had suffered one of its worst five-day stretches since the election.
The epic plunge in global yields that defined August has now been wiped off the board. CTAs have likely begun to pare their legacy bond long as the duration infatuation continues to morph into outright aversion amid a pro-risk/pro-cyclical rotation that’s picking up steam.
This week, we’ll get CPI in the US. It will be watched more closely than usual, and not just because yields are on rise. At the post-FOMC press conference last month, Jerome Powell made it abundantly clear that it would take a rather dramatic spike in inflation to put rate hikes back on the table. “We would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns”, Powell remarked.
That appeared to suggest that policymakers are more than happy to tolerate an overshoot.
“Powell attempted to walk back any perceived market ‘hawkishness’ as he effectively signaled a completely ‘asymmetric’ policy going forward, one where it would take ‘significant, persistent’ rise in US inflation before they would ever again be able to consider a rate hike, versus what we already know is a ‘low bar’ to cut”, Nomura’s Charlie McElligott wrote late last month, underscoring the point.
Powell will be on Capitol Hill this week to address the congressional Joint Economic Committee, and the first day of that will coincide with the CPI release.
Note that the term premium has now jumped more than 40bps off record lows hit in August.
The resumption of QE across the pond may work against that upward trend, unless of course easy monetary policy finally starts to work, in which case reinvigorated growth prospects and rising inflation expectations will pull things higher.
Speaking of inflation expectations, five-year breakeven rates in the US are now back to levels last seen in July, another sign of the upbeat outlook.
Again, all of this is down to a combination of three assumptions: 1) there will be an interim trade deal between the US and China that includes tariff relief, 2) a lifting of trade uncertainty and the lagged effect of coordinated monetary easing will manifest itself in better growth outcomes soon, 3) the Fed isn’t going to push back on inflation overshoots barring some manner of huge upside surprise.
In addition to the above, the White House is due to decide on EU auto tariffs this week, but will probably punt.
One thing you might not have been expecting, but that is sure to be a spectacle, is a Trump speech at the Economic Club of New York on Tuesday.
“He believes the United States has incredible potential and will go on to exceed even its remarkable achievements of the past”, the description of the event reads.