From the Desk of Ian Culley @IanCulley
Despite another CPI report and the latest job numbers reflecting easing inflationary pressure, markets are a mess!
Indecision and uncertainty are running high. Investors simply aren't able to get a read on the economy and the Fed's next step.
I don’t blame them.
If you’re focusing on the Fed comments du jour or lagging economic data that will likely be revised in the future, confusion and pain are the higher probability outcomes.
That’s why we study price.
Let’s check in on the charts to clear things up…
Here’s the US 10-year breakeven inflation rate:
This chart shows the difference between the 10-year nominal bond yield and its corresponding TIPS Treasury yield, gauging inflation expectations (or the real return on a 10-year Treasury bond).
While the chart doesn’t reveal direct buying and selling pressure, both yields are based on the bond market. And, as is the case for global risk assets, the former 2018 highs (the prior-cycle peak) are significant.
It’s hard to argue that disinflation is upon us if the 10-year breakeven inflation rate holds above those former highs. The same reasoning applies to inflationary assets, especially crude oil.
Check out the overlay chart of the US 10-year breakeven inflation rate and crude oil futures:
They move tick-for-tick over longer timeframes. I don’t want to make the bet these charts resolve in opposite directions.
With crude oil reclaiming its respective 2018 highs earlier this month, the commodity and bond markets -- unlike the Fed -- are sending a clear message: Inflation is not dead!
Sure, we can call it “sticky.” That’s fine as long as we understand we’re still in a rising rate environment and inflation remains elevated.
The charts tell the real story – a narrative that you can follow and trust.
Stay tuned!
Countdown to FOMC
After the recent 25 basis-point increase, the market is pricing in another single-hike at the May meeting.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of April 13, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!
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