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Thursday, October 4, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 9/27/18 | 2.10 | 2.18 | 2.37 | 2.58 | 2.83 | 2.89 | 2.96 | 3.02 | 3.06 | 3.13 | 3.19 |
| 9/28/18 | 2.12 | 2.19 | 2.36 | 2.59 | 2.81 | 2.88 | 2.94 | 3.01 | 3.05 | 3.13 | 3.19 |
| 10/1/18 | 2.13 | 2.23 | 2.40 | 2.60 | 2.82 | 2.90 | 2.96 | 3.04 | 3.09 | 3.18 | 3.24 |
| 10/2/18 | 2.14 | 2.23 | 2.41 | 2.61 | 2.82 | 2.88 | 2.94 | 3.01 | 3.05 | 3.14 | 3.20 |
| 10/3/18 | 2.15 | 2.23 | 2.41 | 2.62 | 2.85 | 2.94 | 3.02 | 3.10 | 3.15 | 3.24 | 3.30 |
Source: U.S. Department of the Treasury, as of 10/03/2018
Inflation, Inflation Expectations and Unexpected Inflation …?
Core inflation, as measured by the PCE, CPI and PPI, is increasing at an annual pace of a little more than 2.00% (+/-). Perhaps this explains the general consensus that the benchmark Treasury yield curve will continue to flatten, as policy makers gradually raise the overnight target rate throughout 2019. Below is a forecast of the U.S. Treasury curve from Bloomberg Intelligence, published as of 10/01/18.
Source: Bloomberg 10/04/18
Obviously, inflation expectations are benign, suggesting the market is not worried about the possibility of an acceleration in the pace. Presumably, economic expansion and inflation pressures will be somewhat diminished by the coming increases in short-term rates, as the FOMC attempts to gradually normalize monetary policy.
But what if the inflation outlook shifts?
On Monday, Federal Reserve Chairman Jerome Powell said, “We attribute a great deal of the stability of inflation in recent years to the anchoring of longer-term inflation expectations. And we are aware that it could be very costly if those expectations were to drift materially. From the standpoint of contingency planning, our course is clear: Resolutely conduct policy consistent with the FOMC’s symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down.”
Investors should note the economy continues to operate with limited slack. The ADP Employment Report released yesterday suggests hiring remains resilient, despite the constraint of a limited pool of workers to fill positions. According to Mark Zandi, chief economist at Moody’s Analytics, “Employment gains are broad-based across industries and company sizes. At the current pace of job creation, unemployment will fall into the low 3% range by this time next year.”
Also announced yesterday, Amazon will be raising the minimum wage for all of their employees to $15 / hour, joining Target, Costco and Walmart that have all pledged to raise wages. Investors might also note that companies like PepsiCo and Coca-Cola have said they will be raising prices.
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