Inflation breakevens rising again

Real yields edge down

Chart of the Day

Bond yields have received a lot of attention in recent weeks, especially since the Fed delivered a hawkish message at its September meeting. In the past week, the upward trend in the 10-year has paused, with the yield falling by 2bp. There have still been some interesting moves under the hood, with the 10-year TIPS (real) yield falling 8bp while the breakeven inflation component, a proxy for investors’ inflation expectations, moved 6 bp higher. At 2.45%, the 10-year breakeven rate is still a bit below the 2.57% peak earlier this year. If it rises above that level, the Fed might start to get a bit more uneasy.

Macro

The ISM services index was barely changed in September - a weighted average of the ISM surveys rose to 62.1. That points to strong GDP growth of above 5% annualized, but the latest Atlanta Fed GDP tracker points to Q3 growth of a much lower 1%.

An average of the ISM prices paid indices rose in September and suggests inflation will stay above 4%.

The US August trade data showed exports rose by 0.5% MoM and imports increased by 1.4% MoM, causing the dollar trade balance to fall again.

In the UK, growth in car registrations is falling sharply again amid supply shortages - petrol shortages could put off a few buyers as well.

We have policy rate lift-off in New Zealand - expect more to come.

Markets

But remember the market is already pricing in tightening, hence why the NZD was little changed after the news.

There was a rebound in equities yesterday. A mixed set of performances by sector. Financials rising and real estate falling despite a relatively muted move in yields.

Traders are pricing in higher inflation in the coming five years than the five years after that (5-yr/5-yr = 2026-2030).

There’s been a very sharp rise in inflation expectations in the UK, which is one reason why the Bank of England has been sounding more hawkish.

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