EUR/USD Rejection of Key Institutional Level for DXY?
Despite the fact that consumer inflation in the United States is at its highest level in over 40 years, some segments of the financial markets are breathing a sigh of relief since they had anticipated a headline year-over-year rate closer to 7%. On Friday morning, investors lifted their demand for US Treasuries sharply in response to the government's consumer price index data, which suggested that the headline annual rate of inflation was 6.8 percent in November, down from 7.8 percent in October. While the reading was definitely high, it stayed below the 7% level that some had forecast as a potential issue, boosting the likelihood that inflation is about to peak. While the CPI print was high, according to Tim Holland, chief investment officer of Orion Advisor Solutions, "some folks on Wall Street were anticipating an even higher figure." The core CPI figure, which excludes volatile goods, "met expectations." (MarketWatch got an e-mail from Holland, who stated that "the two factors outlined above have many people assuming that we are on the verge of, if not already at, peak inflation." That appears to us to be a reasonable scenario, one that would push us toward future deflation and thus support or explain little to no change in yields. " Rising inflation is frequently the asset class that suffers the most from rising inflation, which devalues bonds over time. Normally, investors would sell their Treasury bonds in response to a higher inflation print, which would result in higher rates. Rather than that, investors' sustained demand for US government paper, whether domestically or internationally, drove bond prices higher and yields lower on Friday, as they braced for Wednesday's Federal Reserve policy statement. On Friday, yields fell across the curve, except for one- and two-month bill rates, which stayed steady. The yield on the 10-year Treasury note (USD10Y) has been reduced to around 1.45 percent, while the yield on the 30-year Treasury note,USD30Y, has been reduced to around 1.84 percent, both of which remain at historic lows. Meanwhile, equity investors initially ignored the inflation report until all three major US market benchmark indexes began to revert to their early-year gains. As Gennadiy Goldberg, TD Securities' senior US rate strategist, points out, the market gives more attention to monthly data than to the headline year-on-year figure. Goldberg explained in a phone interview that "yields are declining because month-over-month inflation was lower than predicted and a significant amount of Fed tightening has already been factored in—with roughly three rate hikes expected in 2022." "If you look at the long end and the price of overnight-indexed swaps, the long-run terminal rate is just 1.5 percent," he noted, citing September predictions from Fed officials of 2.5 percent. That might be a hint that the market is discounting a policy gaffe. Surprisingly, the 2-year yield, which reflects expectations for the Federal Reserve's short-term policy path, fell the most, to approximately 0.64 percent, still near the year's highs. The decision surprised investors since they expected the Fed to accelerate the pace of asset sales in order to give it greater flexibility to hike interest rates sooner next year and combat inflation.
Some financial markets are relieved, as they had expected a headline rate closer to 7%.
The government's consumer price index showed 6.8% annual inflation in November, down from 7.8% in October.
It was still above the 7% level that some had predicted as problematic, raising the likelihood of a peak in inflation.
Tim Holland, CIO of Orion Advisor Solutions, says Wall Street was expecting more.
The core CPI "meets expectations." "
Many people believe we are nearing, if not already at, peak inflation," Holland says.
Assuming this is true, we could see future deflation while yields remain stable.
Bonds are the most vulnerable asset class to rising inflation.
A rise in inflation leads to the sale of Treasury bonds, raising rates.
Rather, investors waited for the Federal Reserve's policy announcement on Wednesday, which drove prices up and yields down.
On Friday, yields fell across the curve, except for one-and two-month bills.
The 10-year Treasury yield (USD10Y) is now around 1.45%, while the 30-year Treasury yield (USD30Y) is around 1.84 percent.
Initially, all three major US market benchmark indices reversed early-year gains.
The market prefers monthly data over annual data, according to TD Securities' Gennadiy Goldberg.
Goldberg attributes this to lower-than-expected monthly inflation and the Fed's three rate hikes in 2022.
According to the Fed's September projections, the long-run terminal rate is only 1.5 percent.
The market may discount a policy blunder.
The 2-year yield was near a year-high of 0.64 percent a year ago.
Investors expected faster asset sales to help the Fed raise rates sooner next year and combat inflation.