‘Any Disappointment’

Who’s afraid of inflation?

Not Lacy Hunt, that’s for sure. And it seems like Albert Edwards may have pushed the date back for the onset of what he’s preemptively dubbed “The Great Melt,” a period when fiscal-monetary partnerships in advanced economies will finally break through the permafrost left over from his longstanding “Ice Age” framework.

But plenty of other folks are — afraid of inflation, that is. And with base effects poised to start working their “magic” on some of the incoming data just as stimulus check distortions begin to show up, things could get interesting in a hurry.

Honestly, we could use a dash of “interesting” if it would make volumes great again. Last week felt, at times, like the handful of people loitering around the monitors might have washed down a couple of benzos with a swig of Deep Eddy Sweet Tea Vodka. Not that I’d know what that feels like. But I imagine it’s a glorious, blissful kind of somnolence that ends with a beach nap (or a dirt nap, if you get the dosage wrong). “Friday was particularly placid,” Bloomberg remarked, flagging the sleepiest day since Christmas Eve.

CPI and retail sales are on deck, along with a deluge of second- and third-tier numbers, as well as the return of supply. PPI was an amuse-bouche, and March ISM services was hotter than a batch of homemade chile-árbol-infused tequila you might drink out of a repurposed jelly jar between slapboxing with a stranger on a front porch in the wrong neighborhood. (Wow, these allusions are getting pretty specific. Again, though, these are things I wouldn’t know anything about. I can only imagine.)

That’s the setup not just for March inflation data and a stimulus-fueled rebound in retail sales, but also for the Empire and Philly Fed surveys, preliminary University of Michigan sentiment and a hodgepodge of housing data. As a reminder, the figure (below) shows where we are on the inflation front.

“Hawks and doves are set for a particularly fierce fight, and while inflation data will jump in the near term, the next batch of real information about the inflation path will likely arrive this summer, as we find out whether the return of consumer demand for in-person discretionary services leads to sharp upward pressure on wages and whether that wage pressure passes through quickly into prices, leading to higher inflation than the consensus expectations,” Credit Suisse’s James Sweeney wrote last week, on the way to suggesting that it will be “a few years after that aerial skirmish” before we can begin asking the “larger questions about the long-term sustainability of both the heavy stimulus and the need to finance [it].”

“The combination of an early auction schedule and CPI / retail sales will once again highlight the two defining themes of 2021; building issuance and fiscal-stimulus inspired consumption and inflation,” BMO’s Ian Lyngen and Ben Jeffery said, in their weekly, adding that while “this is by no means new territory for the market, it does come at a particularly pivotal moment as investors appear to be actively recalibrating the extent to which yields can back up without a meaningful acceleration of organic growth outside of that owing entirely to Washington’s fiscal endeavors.”

Note that five-year yields, which surged in the shortened Good Friday session following March’s jobs report, posted their biggest weekly drop since June last week (figure below).

The March Fed minutes clearly indicated that no tightening of any kind is on the horizon. “This should leave the five-year capped at 1% and the 5s30s curve steepening,” TD’s Priya Misra and Gennadiy Goldberg said. Misra went long fives when yields jumped following payrolls. “We continue to forecast the 10-year reaching 2% by year-end as we expect continued strong economic data, a total infrastructure package of about $4 trillion, and a dovish Fed on tapering and tightening,” they went on to say.

For TD, tapering should start in September of next year, and tightening not until September of 2024. Hopefully, America’s “tent cities” will be gone by then or, at the least, they’ll be less “substantial.”

“We expect the pace of the [bond] selloff to moderate as 10-year yields get closer to 1.75%,” SocGen’s Subadra Rajappa wrote. After the worst quarter for Treasurys in decades, “the risks are a bit more symmetric,” she added, noting that “bonds are priced to perfection for positive outcomes on growth, and any disappointment could dampen the rise in yields.”

[Insert generic, lazy ‘What could go wrong?’ cliché]