E-mini S&P 500 Futures (March): Settled at 3792, down 25.50
E-mini Nasdaq-100 Futures (March): Settled at 12,897, down 200.25
U.S. benchmarks edged higher ahead of the bell and continued their post-Nonfarm Payroll consolidation. Amid ongoing political turmoil, the inflation narrative is quietly poking its head around the corner. Today, the 10-year Treasury yield hit a high of 1.175% as it closes in on our target of 1.25%, something we’ve steadfastly capitalized on since calling for the monumental shift at the end of September.
Last week, ISM data blew the doors off and Democrats took control of all 3 branches of government. This strong data is the first sign of what we’ve been calling for: inflation. With unprecedented amounts of stimulus sloshing around, it’s only a matter of time before inflation shows up. We may not see it in all the straightforward economic data just yet, but Treasury yields are certainly telling us something right here.
Tomorrow, we look to U.S. CPI; expectations are still very tame at +1.6% YoY and +0.1% MoM. Added tailwinds have certainly come from the Georgia elections and Democrats’ newfound control of the U.S. Senate. This paints a foreseeably clearer path to more fiscal stimulus which means more Treasury supply to pay for it.
Federal Reserve members have begun pointing to the second half of the year, where they expect fiscal measures, the vaccine, and reopening to converge and ignite a strong economy. Yesterday, both Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin said such an event should allow them to reduce bond purchases, the same purchases that keep that added supply from pushing yields further.
Yes, our target is 1.25% for several technical reasons, but fundamentally, because that is where, when it was trading at 0.7%, that we expected it to begin garnering ongoing headline attention which is proven to encourage a timeout.
Today, Raphael Bostic spoke again at 7:30 a.m. and later at 10:00 a.m. CT. Fed Governor Lael Brainard, a permanent voting seat, spoke at 8:35 a.m. CT. Outgoing 2021 voters, Dallas Fed President Steven Kaplan spoke at 10:00 a.m. CT and Cleveland Fed President Loretta Mester speaks at 11:00 a.m. CT. Closing things out are 2022 voters Kansas City Fed President Esther George at noon CT and Boston Fed President Eric Rosengren at 1:00 p.m. CT.
We look forward to not only digesting their narrative but the results of the 10-year Treasury auction at noon CT. Listen, we believe there is room for this move to continue. Traders must be cautious chasing a move 3 months in the making; patience will bring opportunity. At the same time, markets like to bring the most pain to the greatest number of people and would be the underlying reason for a quick move from 1.25% to 1.50%; the real pain is at 1.50%.
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