E-mini S&P 500 Futures (March): Settled at 3905.50, down 2.50
E-mini Nasdaq-100 Futures (March): Settled at 13,680.25, down 2.75
U.S. benchmarks mustered another firm session yesterday and are pointing higher for an 8th straight trading day. The inflation narrative is front and center; first with U.S. CPI at 7:30 a.m. CT, followed by a 10-year Treasury auction at noon CT, and wrapped up with a speech from Fed Chair Jerome Powell at 1:00 p.m. CT.
The U.S. Consumer Price Index (CPI), an inflation gauge, comes on the heels of China’s read last night. Where China’s CPI came in soft at -0.3% YoY versus -0.1% expected and down from +0.2% in December, the Producer Price Index (PPI) broke a string of 11 straight contractions at +0.3%.
Earlier this morning, Germany confirmed CPI for January rose on the fastest pace YoY since March 2020 and MoM since April 2019. The Federal Reserve’s preferred inflation gauge is the Core PCE Index. Nearly 2 weeks ago, it hit 1.5%, the highest since August, after receding a bit.
We watch the Core CPI read most closely: it measures the change in the price of goods and services, excluding food and energy. Analysts expect it to continue its recession from a 1.7% peak in August to 1.5% for January.
We don’t find inflation a headwind; in fact, it’s a tailwind from many perspectives, signaling an increase in demand and economic activity in the later innings of the pandemic. At levels of a mere 1.5%-1.8%, it isn’t inviting any concerns that the Federal Reserve will have to tighten policy.
Remember, last year, the Fed committed to symmetrical inflation targeting. After years of inflation persistently below their 2% target, they’ll symmetrically allow it to run how. However, the fear is a quick jump in the coming months, which would be a cause for concern. On the other side of the coin, a soft read on inflation will bring added bullish tailwinds.
The added layer here is the rise in Treasury yields. With Congress releasing details of their spending plans, President Biden’s lauded $1.9 trillion fiscal package is within reach. In order to cover the added costs, the Treasury will print more debt; the larger supply of Treasuries could open a trapdoor in prices, inversely lifting yields quickly from 1.25% to 1.50%.
We’ve said for weeks that upon a high velocity move, 1.5% in the 10-year will become a pain threshold for this market. This certainly pins today’s 10-year and tomorrow’s 30-year auction in the headlines. Coupled with comments from Fed Chair Powell, of course.
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