Potpourri

The market was back to pondering another sharp move higher in yields Wednesday, although things calmed down around midday in the US.

At one point, 10-year yields were higher by 10bps, up near 1.50% — again.

The catalyst (or one catalyst anyway) was a concurrent selloff in gilts, triggered by the UK’s plans to borrow considerably more than the market expected. That news, combined with reports that the ECB doesn’t necessarily think recent rate rise calls for “drastic action,” added a few more wrinkles to an already convoluted narrative. Heavy corporate supply stateside was a factor too. I mentioned that here Tuesday, for those interested.

The UKs Debt Management Office will sell GBP295.9 billion of bonds over the next fiscal year. The median forecast was for around GBP250 billion.

The UK economy, you’re reminded, is coming off its worst year since — and this is not a joke — 1709.

Rishi Sunak on Wednesday said it’s “fair and necessary” to raise taxes to help plug holes in the fiscal ship. Corporate taxes will rise to 25% from 19% in 2023 and a freeze on income tax thresholds likely means more people will end up paying more taxes as they earn more money. I won’t delve into the specifics, but Sunak summed it up in plain terms. “Nobody’s take-home pay will be less than it is now as a result of this policy,” he said. “But I want to be clear that [it] does remove the incremental benefit created had thresholds continued to increase with inflation.”

Apparently, Sunak will become the first Chancellor of the Exchequer to raise corporate taxes since the 70s, which is funny, depending on your sense of humor.

And to think, we were only 1,900bps away from zero! So close, yet so far.

In any case, the borrowing estimates out of the UK ultimately weighed on developed market bonds. One notable were US five-year breakevens, which neared 2.51%. That was the highest in a dozen years.

On the off chance you needed additional variables to ponder as you parse an increasingly confusing rates landscape, oil surged Wednesday as US gasoline inventories fell the most in three decades on the heels of the deep-freeze that played havoc with America’s energy complex.

All eyes now turn to OPEC+, which meets Thursday to determine next steps. Those old enough to remember April 2020 will note we’ve come a long way from crude being briefly worth less than nothing to now above $60.

On the data front, ISM services betrayed more evidence of price pressures. But Deutsche Bank’s Stuart Sparks notes that “a persistent challenge for the Fed’s reflationary strategy” is a services sector that’s less sensitive to oil.

“The linkage between commodities inflation and services inflation has weakened substantially over the last two decades,” Sparks wrote, in his latest note. “This is important because the Fed can more or less directly generate commodities inflation, but cannot do the same with services inflation,” he went on to say, adding that “if the Fed is only able to generate commodities inflation, then a taper of the Fed’s balance sheet growth might end the commodities cycle without ever meaningfully impacting services inflation.”


 

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3 thoughts on “Potpourri

  1. yeah, but I think they (the Fed) made it pretty clear they do not intend to do anything that comes even close to tapering

  2. Tomorrow will see Powell doing his best Kevin Bacon (Animal House): “Stay calm. Stay calm. Nothing to worry about.” The next move by the Fed will be to increase their bond purchases, not taper them. That’s the reality of our late-capitalist-stage world.

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