Real interest rates falling again

10-year lowest since start of 2021

Chart of the Day

US bond yields have been falling in recent weeks, and much of the move has been due to lower real interest rates. The inflation-adjusted 10-year yield is now below -1% again, at its lowest since the first quarter. That has given equities a boost, especially tech stocks, but the risk is clearly that real yields could start to rise again later this year if the economy continues to recover strongly and as the Fed eventually announces it is tapering QE.

Macro

China reported that GDP growth slowed to a slightly weaker than expected 7.9% in Q2.

US producer price inflation rose to 7.3% in June, the highest in over a decade, while core PPI inflation increased to 5.6%.

In the UK, core inflation rose to 2.3% in June, although retailers’ price expectations do not point to much further strength.

The weekly EIA report showed that US crude production is starting to pick up.

The US oil refinery utilization rate is now back at pre-Covid levels.

Markets

The speed at which lumber spiked and then fell again has been astounding.

Inflation breakevens from TIPS are diverging, with the 5-year rising again lately while the longer-term 5-year/5-year remains softer.

The SKEW has dropped back in recent days, but remains unusually high, implying that options are still pricing in a continued high risk of a large downside move in equity markets.

Lower real interest rates may be helping tech stocks again.

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