The two-year Treasury, or the instrument most sensitive to monetary policy, sold off following the release of weekly jobless claims which declined by the greatest amount since June thus suggesting employers are still holding onto workers in a gradually cooling labor market. The decline was below all estimates in a Bloomberg survey of economists.
Treasuries were perhaps further unsettled by a rise in consumer inflation expectations. According to the University of Michigan sentiment survey, consumers expect inflation will climb at an annual rate of 4.5% over the next 12 months, up from 4.4% expected last month. They see costs rising 3.2% over the next five to 10 years, up from 3.0%.
What is perhaps disturbing in the data is that gas prices have declined significantly during the month. Historically inflationary expectations correlate with gas prices. The data also indicates that one year gas price expectation rose to its highest reading since June 2022 and five-year gas price expectations are their highest since March 2022.
These expectations also don’t correlate with past sentiment levels as typically the current environment is extrapolated into the future.
A WSJ headline read Interest Payments are Walloping Government Budgets. Every industrialized economy experimented with quantitative easing over the past 10 years, a policy that greatly increased sovereign debt levels.
Because of this exponential increase in debt outstanding and a surge in interest rates, sovereign governments are expected to spend a net $2 trillion paying interest during FY24 according to the IMF. Fitch rating services came to a similar conclusion. By 2027, interest payments could top $3 trillion.
These interest payments will crowd out more productive spending.
A major issue at hand is that governments are doing nothing about their spending levels which are “unsustainable” according to the IMF [and FRB Chair Powell].
Unfortunately, history suggests action will only be taken when a crisis occurs.
The US debt will be funded but the question is at what price? Will inflation be a secondary consideration, where the demand by governments may be the primary determinate of yields?
What will happen this week?
The economic calendar is comprised of several sentiment indicators, revised 3Q GDP, the ISM Manufacturing Index and the Beige Book. How will this data impact psychology?
Last night the foreign markets were down. London was down 0.28%, Paris down 0.04% and Frankfurt down 0.15%. China was down 0.30%, Japan down 0.53% and Hang Seng down 0.20%. Futures are nominally lower on Chinese data indicating a sharp slowdown in its industrial profit growth. The 10-year is off 2/32 to yield 4.47%.
