According to wire services, this week there is expected to be $685 billion in gross Treasury issuance, a record. The Treasury is entering into a period of increased bill issuance, exceeding the 18% to 21% historical and recommended range for this segment of the Treasury maturity spectrum.
There is a tug of war between the market and the Federal Reserve regarding monetary policy. As stated many times, the markets believe the Fed will lower rates by 150 bps in 2024. The Federal Reserve is suggesting half that…75 basis points.
It is widely believed there will be strong demand for this week’s auction given current interest rates but at some juncture supply will impact yields. The question is at what point?
Many believe the federal debt is at unsustainable levels. This concern has been around for many years thus complacency in the market.
There is a minority of economists who believe the markets are underestimating service sector inflation, which is still running higher than goods inflation. This suggests either goods’ inflation must decline further or there must be a reduction in service sector inflation.
Cost push or wage inflation has become imbedded in the economy. OER is still accelerating versus declining as many had predicted. Against this backdrop, the odds that service sector inflation will decline significantly are low.
Will the events in the Red Sea accelerate “goods inflation?” It depends upon how long there is a disruption. Shipping costs have more than quadrupled and transit times have tripled according to Bloomberg.
If the current environment remains, the odds of “goods inflation” accelerating increase dramatically.
As noted above, the markets are entering into a period of increased Treasury bill issuance [maturities less than one year]. What happens to projected interest coverage if short term rates remain the same rather than decline? Worse yet, what will be the impact of an increase in short-term rates, an environment that has not even been remotely considered?
The concentration in short term bills may prove to be misguided.
Commenting on Friday’s market activity, led by the mega cap issues equities again advanced, an advance predicated upon falling inflation and the belief the Fed will lower rates by 150 bps in 2024.
What will happen this week? Will the massive out performance of the mega capitalized companies continue?
This is a busy week for earnings announcements. Several mega sized technology firms are scheduled to release including TSLA and NFLX. Results released to date have generally exceeded on the upside. Will the trend continue?
The economic calendar is of initial estimates of fourth quarter GDP and its ancillary inflationary indices, several manufacturing and housing data points, and the monthly PCE statistics.
Last night the foreign markets were up. London was up 0.15%, Paris up 0.41% and Frankfurt up 0.41%. China was down 2.68%, Japan up 1.62% and Hang Seng down 2.27%.
Dow and NASDAQ futures are up 0.15% and 0.60%, respectively. The 10-year is up 8/32 to yield 4.07%.
