Written by Peter Baden, CFA, Chief Investment Officer
Headlines of the Week
An important week for inflation as CPI and PPI both reported numbers that were high but showing signs of moderating. The US Treasury yield curve was virtually unchanged for the week. With the good jobs report from last week traders pushed the yield on the 10-year US Treasury Note to 1.36%. This continues an uptrend that started from the recent low of 1.17% on August 3rd. However, the CPI news and a successful auction of a new 10-year US Treasury, and weak consumer sentiment brought buyers into the market, causing the yield fall to 1.30%.
The Consumer Price Index (“CPI”) reported Tuesday indicated a moderation of recent overheated trends. The headline CPI YOY was 5.4%, without food and energy the number was 4.3%. However, both numbers were within economist’s expectation and those categories that were driving the outsized gains, moderated. The Producer Price Index (“PPI”), issued Wednesday, estimated Final Demand MoM for July was up 1.0%. this was over expectations of 0.6%, but still being dominated by categories like Automobiles & Auto Parts (+17.4%). Economists took both reports as potential validation of “Transitory” and the market rebounded.
On Friday the University of Michigan Consumer Confidence Survey surprised the markets (81.2 estimated), printing 70.2, The lowest number since November 2011. Taking this as an indicator of COVID concerns and potential economic moderation, bonds rallied. As virus infections and related recommendations, restrictions, and mandates increase the potential economic impact increases. Already companies are reconsidering back to office plans and events are postponing or requiring vaccinations to attend. While a potential negative for growth, a moderation could cool off some of the hotter inflation categories, further supporting “Transitory” theories.
Next week we get readings on manufacturing with the Empire Index, Industrial Production and Capacity Utilization releases. Retail sales and housing numbers are also due for release. Given the indications in the CPI & PPI numbers, we would expect strong manufacturing and moderating retail sales and housing figures.
Chart of the Week
Indexes used for AAA Municipal Yields
2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)
5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)
10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI)
30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)
Indexes used for US Treasury Yields
2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)
5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)
10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)
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