Shoppers are seen wearing masks while shopping at a Walmart store in Bradford, Pennsylvania, July 20, 2020.
Brendan McDermid | Reuters
Interest rates are expected to continue their upward march, but for now they’re not expected to get high enough to harpoon the stock market.
Treasury yields have been rising quickly in the last week, and the benchmark 10-year yield has been on a tear – reaching 1.33% in the early morning hours Wednesday before retreating below 1.30%.
Yields move opposite price, and the 10-year has risen from about 1.15% just a week ago to levels that are close to where they were when the pandemic started hitting the economy last February.
The 10-year is key to the economy, since it impacts mortgages and other consumer and business loans.
Bond strategists say the move in yields has opened the door for a higher move, and a next logical target for the 10-year is 1.5%. The yield is unlikely to go much higher in the near term unless inflation picks up or there is a signal from the Fed that it is ready to tighten policy, which is highly improbable.
“I think it’s reflective of economic conditions, which is why other financial assets, like equities, aren’t taking it too badly,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management.
“The thing is you ain’t seen nothing yet,” he said. “That’s with a $600 stimulus check. What about with a $1,400 stimulus check in hand?”
The Treasury market has been pricing in a more aggressive fiscal stimulus program from the Biden administration than many analysts had initially expected.
The proposed $1.9 trillion package winding its way through Congress may not be reduced by much. The package includes a $1,400 payment to individuals, on top of the $600 they received in early January.
Aside from the jobs report, the streak of recent data has shown improvement.
January retail sales, reported Wednesday, rose 5.3%, versus forecasts of 1.2% and following a decline in December.
The producer price index also rose sharply, up 1.3%, the most since 2009 in January as the cost of goods and services jumped. That suggests inflation is beginning to rise for manufacturers and can be a forewarning for higher consumer prices.
JPMorgan economists estimate the rise in the producer price index translates to higher forecast of a 1.7% increase in year-over-year personal consumption expenditures, the Fed’s preferred inflation measure.
The so-called PCE measures the changes in the cost of goods and services purchased by consumers.
“If this forecast for core PCE inflation is realized, it would be the firmest monthly increase since January 2007 while keeping the year-ago core PCE rate below the FOMC’s 2% inflation target,” the JPMorgan economists wrote, referring to the Federal…
Go to the news source: Interest rates will continue to rise, but don’t blame it all on inflation, econo…