Well, you’ve made it. The Treasury Department will raffle off $34B worth of 10-Year paper this afternoon, as well as $20B worth of the long bond (30-Year) on Wednesday. The Census Bureau will publish March Retail Sales on Thursday morning, while the Federal Reserve puts March Industrial Production data to the tape on Friday even with financial markets closed for a holiday.
All of that is important, not to mention that first-quarter earnings season also kicks off in earnest on Wednesday. But the next “big thing” that traders and investors have been focusing on has been March CPI. The Bureau of Labor Statistics releases that data this (Tuesday) morning at 08:30 ET.
In a rather stunning interview on Bloomberg TV, the Biden administration’s top economic adviser, National Economic Council director Brian Deese, said, “We are facing a lot of uncertainty, we are facing rocky waters right now.” In reference to the war in Ukraine and supply-chain issues stemming from Covid lockdowns in Asia, Deese did add, “The United States is probably better positioned than any other major economy to navigate effectively through them.”
On this morning’s consumer-level inflation print for March, Deese looks for an “elevated print,” but does see reason for optimism: “We will see inflationary pressures moderate. They will be lower than they are today at the end of this year and lower still in the coming year.” Then Deese added, “That’s our focus and that’s our hope.”
Kind of wish Deese had not added that last part regarding “hope.” If having the current lead economic adviser of any administration refer to the nation’s current economic reality as “rocky waters” is not unnerving enough, to talk about the future in terms of “hope” simply forces the concerned individual — whether deserved or not — to envision in the nation’s economic leadership, a supreme lack of confidence. Even if, to a degree, we do see what he sees.
Great Expectations
Or maybe we should think of this morning’s March CPI release as “Wuthering Heights.” White House press secretary Jen Psaki tried to back Deese up on Monday. Psaki stated, “We expect March CPI headline inflation to be extraordinarily elevated due to Putin’s price hike.” At least Psaki had the political wherewithal to cast blame elsewhere. The press secretary added: “We expect a large difference between core and headline inflation reflecting the global disruptions in energy and food markets.” You might think “no duh,” but remember she is addressing the mainstream media, and must keep it on that level.
Consensus view for March CPI appears to be centered around 8.3%/8.4% year over year (or +1.1% m/m, but the annual print is what economic folks are watching). My expectation is currently for growth of 8.5%. The range of professional opinion spans from a low of 7.7% to a high of 8.6%. I haven’t seen anyone who I consider to be an economist outside of those parameters. Not that bearing the title of economist makes one correct any more often than not.
Given the wild volatility of both energy and food pricing over the month of March as much of the planet has sanctioned the Russian Federation, the Ukrainian planting season was completely ruined, and key Chinese port cities have been forced to shutter due to surging Covid infections, there should be a great disparity between headline March CPI and the core print. Core CPI is expected to hit the tape at annual growth of 6.6% with a professional range spanning from 6.3% to 6.7%. I am also at 6.6% for this release. Wall Street sees a month-over-month print of 0.5% at the core.
Lapping Inflation
What Brian Deese sees is that next month, when the Census Bureau puts April 2022 data to the tape, the economy will be lapping the initial upward impacts on consumer-level inflation in terms of the year-over-year comparison. Even if prices stay where they are, or rise more slowly, which I don’t think they will, the pace of acceleration on an annual basis should decelerate.
Take a look here to see what I’m trying to illustrate (without stealing someone else’s charts).
April 2020 0.3%
May 2020 0.1%
June 2020 0.6%
July 2020 1.0%
August 2020 1.3%
September 2020 1.4%
October 2020 1.2%
November 2020 1.2%
December 2020 1.4%
January 2021 1.4%
February 2021 1.7%
March 2021 2.6%
April 2021 4.2%
May 2021 5.0%
June 2021 5.4%
July 2021 5.4%
August 2021 5.3%
September 2021 5.4%
October 2021 6.2%
November 2021 6.8%
December 2021 7.0%
January 2022 7.5%
February 2022 7.9%
March 2022 8.5% (expected?)
Cause & Effect
Financial markets have been trying to price in not only this nearly “runaway” consumer-level inflation, but also the expectation for tightening monetary
For the day on Monday, the Treasury yield curve continued to steepen. The yield for the U.S. 10-Year Note “popped” seven basis points higher to 2.79%, and has traded as high as 2.82% overnight. I see it at 2.80% at zero dark-thirty Tuesday morning.
The yield for the 2-Year Note actually contracted by one basis point on Monday, dropping to 2.51%, though I see 2-Year paper paying 2.53% as the wee hours pass.
The movement in the spread between the yields of that 10-Year and the 2-Year since we turned the page on the calendar is incredible:
Yes, I still use a paper calendar. (Old guys rule.) The problem, for markets over the short-term (because over the long run this is healthy) is that real yields are headed for positive territory. Now, in the moment, this will constrict demand broadly across the entire economy, and that’s going to feel like getting caught by the wrong crew when taking a shortcut through an alley you knew not to walk down, but damaging activity or velocity is likely the only way to arrest inflation.
Drawing from the Treasury Department’s online resource center, one can see movement for end-of-day daily yields for the 10-Year Note (over seven business days) and even more telling, the movement in end-of-day real yields for said debt security.
Date US 10 Year Note Yield US 10 Year Note Real Yield
04/01/22 2.39% -0.41%
04/04/22 2.42% -0.38%
04/05/22 2.54% -0.30%
04/06/22 2.61% -0.22%
04/07/22 2.66% -0.16%
04/08/22 2.72% -0.15%
04/11/22 2.79% -0.12%
This march toward positive real yield territory for the U.S. benchmark has put the whammy on equity markets, primarily on tech or “growthy” type stocks that have tended to run at higher valuations than the market in general. On Monday, the S&P 500 gave up 1.69%, surrendering it’s 50-day simple moving average (SMA) in the process. The Nasdaq Composite dropped 2.18%, and even more significantly, lost contact with it’s 50-day SMA.
Market back in correction? That’s really up to portfolio manager behavior now. Is there a move back toward those 50-day lines? Will the PMs that fell behind the curve on Monday move to catch up? Remember, there was a broad professional chase in the other direction into the quarter’s end. A lot (more than a few) of “pros” are feeling a bit foolish right about now.
Trading Notes
Fear Not
“We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.”
– Plato
Economics (All Times Eastern)
06:00 – NFIB Small Biz Optimism Index (Mar): Expecting 93.5, Last 95.7.
08:30 – CPI Mar): Expecting 8.5% y/y, Last 7.9% y/y.
08:30 – Core CPI (Mar): Expecting 6.6% y/y, Last 6.4% y/y.
08:55 – Redbook (Weekly): Last 14.3% y/y.
13:00 – Ten Year Note Auction: $34B.
14:00 – Federal Budget Statement (Mar): Last $-216.6B.
16:30 – API Oil Inventories (Weekly): Last +1.08M.
The Fed (All Times Eastern)
12:10 – Speaker: Reserve Board Gov. Lael Brainard.
T0day’s Earnings Highlights (Consensus EPS Expectations)
Stephen Guilfoyle is portfolio manager of TheStreet’s Stocks Under $10.
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