The selloff in longer dated Treasuries is continuing. Yields on the benchmark 10-year and 30-year Treasuries are at their highest levels since 2007 and 2011, respectively.
The increase in the yields of longer dated Treasuries is the result of a change in underlying inflation expectations and perhaps an increase in the inflation speed limit from 2.0% to 3.0% as per the WSJ editorial, the result of strong economic growth and the pain it will take to reduce inflation to its 2012 mandated speed limit of 2%.
Commenting about the strength of the economy, the Atlanta’s Fed GDPNow model has boosted its estimate of third quarter growth to 5.8%, up from 4.1% the week before given the upside surprises on retail sales, housing starts and industrial production.
This model is not sacrosanct and to concretely suggest that the economy will grow by this amount with only five to six weeks of real data is fraught with risk. There are still six to eight weeks of real data to be collected, all of which is subject to revision.
However, such estimates are consistent with the trend…the unexpected is continuing as most believed the economy would be close or in a recession at time given the most aggressive Fed in history.
Commenting about a change in the inflationary speed limit, an editorial in the Wall Street Journal penned by Harvard professor and former Chairman of the White House Economic Advisors Jason Furman suggested such should be considered.
If this were to occur, it would greatly increase the risks associated with longer-dated Treasury bonds. The assumptions would be radically changed, and the duration risk must be altered.
There are only two ways to get out of massive debt…default/restructure or inflate. The former is not a viable option given the US Treasury is the global benchmark, therefore inflate. Pay today’s bills with cheaper dollars tomorrow.
Friday FRB Chair Powell speaks at the Jackson Hole Symposium. There is a precedent of major changes in monetary policy announced at this event. Will such a radical change occur on Friday?
Most are expecting the Symposium will be a non-event. However most also thought the economy would be struggling, not projected to grow at the greatest rate since second quarter 2014 ex the COVID induced distortions.
It would be only the third five percent print since 2006 and the greatest growth since 3Q03 when the economy expanded by 6.8% and the 7.5% print in 2Q2000. [data is ex-COVID induced distortions]
Wow!
Commenting on yesterday’s activity, equity markets were bifurcated. Led by AI, the NASDAQ advanced about 1.5% on hopes that NVDA will have an upsized surprise earnings surprise tomorrow. The Dow was flat.
Last night the foreign markets were up. London was up 0.66%, Paris up 1.23% and Frankfurt up 1.07%. China was up 0.88%, Japan up 0.92% and Hang Seng up 0.95%.
Dow and NASDAQ futures are up 0.25% and 0.40%, respectively. The 10-year is up 7/32 to yield 4.32%.
