To Shoo Away the Bond Market’s Doves, Inflation Needed
Bloomberg – It’s going to take a lot to dispel the bond market’s view that the world’s biggest economy needs stimulus, but some consistent signals on inflation would help.
The rebound in March payrolls may have allayed concern that U.S. growth is headed for a ditch, and supported the updraft in yields seen last week. But the weaker-than-expected wage growth in Friday’s employment data still left futures markets reflecting a 70 percent chance of a quarter-point Federal Reserve rate cut this year.
That’s well out of step with the central bank’s current signaling, that it will pause through 2019 and potentially hike again next year.
“For the market to begin pricing in a hike, we will need to see persistent inflation pressures,” said Noelle Corum, a portfolio manager in the fixed-income group at Invesco Advisers Inc. Her expectation is that inflation will quicken enough by year-end to justify another rate increase.
Benchmark 10-year Treasuries yield 2.5 percent. That’s up about 16 basis points from the 15-month low set in March as last week also brought encouraging signs on growth from China. Friday’s U.S. figures also confirmed that the American jobless rate remains close to the lowest in decades.
While bond prices may seem out of step with the tight labor market, they jibe pretty well with investors’ grim outlook for inflation, says Martin Hegarty at Garda Capital Partners. He says the pricing in inflation markets translates to a sustained undershoot on the Fed’s preferred inflation gauge, a phenomenon that would typically justify easing. The central bank’s target for that measure is 2 percent. It’s now at 1.4 percent.
Consumer prices probably rose 1.8 percent in March from a year earlier, according to the median forecast in a Bloomberg survey before this week’s report. In the market for Treasury Inflation-Protected Securities, traders see that clip continuing for the next five years.
“We think the path of inflation priced into the TIPS market is too low,” particularly with officials planning to revisit their inflation-targeting framework, said Hegarty, a global fixed-income portfolio manager focused on inflation markets.
Investors are about to get more insight into the Fed’s thinking on how it’s meeting its inflation mandate. This week brings the minutes from last month’s policy meeting, after which traders ramped up easing bets in response to the Fed’s downward revisions to economic and interest-rate projections.
As for market drivers, this week’s inflation data may fail to force traders out of their dovish positions.
Hegarty says a 0.3 percent monthly increase in the core consumer price index, which excludes volatile food and energy prices, could get the market’s attention. That reading would be above consensus and a pickup from 0.1 percent in February. On an annual basis, core consumer inflation probably remained at 2.1 percent.
If the inflation data fizzle, the best catalyst to push traders to a more neutral position on rates would have to come from overseas, he says. He’s focusing on data on Chinese manufacturing and he’ll also be watching European CPI figures this week.
“One of the biggest things that I’d focus on when looking at how we can price out any cuts in the front end of the U.S. curve would be looking at global activity data.”
What to Watch
The main events are the International Monetary Fund’s updated economic forecasts on Tuesday, and the Fed minutes and CPI data Wednesday For U.S. economic releases: April 8: Factory orders; durable goods April 9: NFIB small-business confidence; JOLTS job openings April 10: MBA mortgage applications; consumer prices April 11: Producer prices; jobless claims; Bloomberg consumer comfort April 12: Import, export prices; U. of Michigan consumer confidence Some Fedspeak ahead: April 9: Fed Vice Chair Richard Clarida speaks April 10: Fed minutes, Fed’s Randal Quarles speaks in Washington April 11: Clarida in Washington; St Louis Fed’s James Bullard on economic and monetary policy; Minneapolis Fed’s Neel Kashkari holds Q&A on Twitter; Fed Governor Michelle Bowman on community banking Here’s the schedule for Treasury auctions: April 8: $42 billion of 3-month bills, $36 billion of 6-month bills April 9: $38 billion 3-year notes April 10: $24 billion 10-year reopening April 11: 4- and 8-week bills; $16 billion 30-year reopening