Treasuries had their biggest two-day loss in months as FRB Chair reiterated the long-held view that the Committee is unlikely to lower rates before May, if not later.
Yields climbed at least 10 bps—the five year as much as 15 bps—after the ISM service sector posted the greatest gain in four months, exceeding all estimates. For the benchmark 10-year note, the two-day increase is about 28 basis points, the biggest gain since June 2022.
Perhaps what was new in the Fed Chairman’s remarks was his validation of the widely accepted view that a geopolitical premium is entirely absent in the markets, further stating geopolitical issues are currently the greatest risk to the economy. Moreover, Powell reiterated the federal deficit is “unsustainable.”
These statements coupled with last week’s declaration that the CPI “understates inflation” has perhaps shattered the prevailing market monetary narrative. Most will accept the difference between the market view and that of the FOMC is perhaps the greatest in several generations.
The Federal Reserve dictates the overnight rate while the market sets longer term interest rates. Both the Fed and the market have been wrong for the past four years.
What are the odds the Fed do not lower rates this year, the result of surging geopolitical pressures that causes inflation to spike. The scenarios are perhaps too obvious—a spike in crude or food prices to the more unknown events such as a further loss of American status in the flow of trade and foreign reserves.
The consistency is that the unexpected are consistently occurring.
How will this week’s Treasury note and bond auctions be received? Have prices been cheapened enough to ensure strong demand?
The surge in Treasury yields is not impacting large cap equities. The NASDAQ 100, which should be most sensitive to an increase in rates, is up 2.78% month to date and 0.10% for the last five days. The S & P 500 is posting a MTD gain of 2.26% and a five-day return of 0.55%.
The Russel 2000, however is posting a MTD loss of 0.02% and five-day loss of 3.21%.
Yesterday, the markets were bifurcated as the Dow declined about 0.7% while the NASDAQ was essentially unchanged.
What will happen today?
Last night the foreign markets were up. London was up 0.53%, Paris up 0.27% and Frankfurt down 0.03%. China was up 3.23%, Japan down 0.53% and Hang Seng up 4.04%.
Futures are flat ahead of a plethora of Fed speakers. Chinese securities soared on speculation authorities are planning kore forceful efforts to end the rout. The 10-year is off 2/32 to yield 4.16%.
