Inflation and Infrastructure

Now that the July employment numbers are in the books, the market will keep an eye on the infrastructure proposal being debated in the Senate along with the latest inflation data.  If a Senate bill passes it will head to the House for review and vote. The House is unlikely to exact too many changes from what the Senate sends over lest Senate Republicans pull their support. Right now the $550 billion price tag is a fraction of the initial $2 trillion or so opening bid so the market impact is likely to be limited. Once a vote is passed on the infrastructure bill Democrats plan to turn quickly to a $3.5 trillion budget proposal that they plan to pass through reconciliation.  Away from Capitol Hill, another round of inflation numbers are due this week with July CPI on Wednesday and PPI on Thursday. Expectations are for some easing in monthly gains in both data series which could lead to small decreases in year-over-year numbers, but only marginally, so the inflation hawks will continue to push for quantitative easing purchases tapering sooner rather than later.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.05% +0.01%
6 Month 0.05% +0.01%
1 Year 0.07% +0.01%
2 Year 0.20% +0.02%
3 Year 0.40% +0.07%
5 Year 0.75% +0.07%
10 Year 1.28% +0.05%
30 Year 1.93% +0.02%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.13%
6 Mo LIBOR 0.15%
12 Mo LIBOR 0.24%
Swap Rates  
3 Year 0.522%
5 Year 0.846%
10 Year 1.300%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Aug 9 JOLTS Job Openings Jun 9.260m 9.270m 9.209m
Aug 10 NFIB Small Biz Optimism Jul 102.0 102.0 102.5
Aug 11 CPI (MoM) Jul 0.5% 0.5% 0.9%
Aug 11 Core CPI (MoM) Jul 0.4% 0.4% 0.9%
Aug 11 CPI (YoY) Jul 5.3% 5.3% 5.4%
Aug 11 Core CPI (YoY) Jul 4.3% 4.3% 4.5%
Aug 12 PPI (MoM) Jul 0.6% 0.6% 1.0%
Aug 13 Import Price Index (MoM) Jul 0.6% 0.6% 1.0%
Aug 13 U. of Michigan Consumer Sentiment Jul 81.2 81.2 81.2

 


Top 5 Events for the Week

August 9—13, 2021

1.  Infrastructure Week— All Week

Now that the July employment numbers are in the books the market will keep an eye on the infrastructure proposal being debated in the Senate. The latest talk is that the debt ceiling negotiations may get rolled into either the infrastructure or budget bills but Dems are resisting that idea for the obvious reason that it is likely to complicate and slow things from here. If a Senate bill passes it will head to the House for review and vote. The House is unlikely to exact too many changes from what the Senate sends over lest Senate Republicans pull their support. Right now the $550 billion price tag is a fraction of the initial $2 trillion or so opening bid so the market impact is likely to be limited. Yet, it’s better that movement on the matter happens and attention can then turn to the debt ceiling negotiations as the CBO estimates that the Treasury’s extraordinary measures will be exhausted by October or November.

 

2.  July CPI- Wednesday

Price increases have been in place since spring but we should start to see some moderation in the coming reports if the term “transitory” has any meaning.  For July, overall CPI is expected to increase  0.5% versus a whopping 0.9% the prior month. The core rate (ex-food and energy) is expected to increase 0.4% versus 0.9% in June.  Overall CPI (YoY) is expected to dip to  5.3% after last month’s 5.4% result. Core CPI (YoY) is expected to decrease to 4.3% after a 4.5% rate in June. So far the market has taken the price spikes in stride, buying into the Fed’s transitory story, and while July is expected to show an easing of sorts, the market will be looking for a trend in lower monthly price gains in order to remain docile over the inflation threat.

Source: Bloomberg

3. July  PPI —Thursday

While the more popular CPI numbers will be released a day earlier, the July PPI will provide additional insight into wholesale and intermediate stage pricing pressures. For July, the overall price gain is expected to be  0.6% versus 1.0% in June. The core rate (ex-foods and energy) is expected to be up 0.5% versus a 1.0% gain in June. For both the overall and core, price pressures are expected to ease some from the strong prints in June.

4. Treasury Auctions—Tuesday/Wednesday/Thursday

The US Treasury will be selling a total of $126 billion in 3-yr, 10-year, and 30-year debt this week that will be used to repay $58.6 billion in maturing issues while raising $67.4 billion in new money.  The debt ceiling is back in effect at $28.4 trillion so the Treasury is employing some maneuvers such as disinvesting in various government pension funds to free up borrowing room with the idea that a new debt ceiling will be negotiated by Congress and the funds and interest returned to these pension funds. The Treasury still hasn’t offered an estimate on when these accounting maneuvers will be insufficient to keep issuing new debt. The CBO estimated in July that Treasury could exhaust its capabilities as early as October or November. Expect the debt ceiling debate to become a hot topic in DC once Congress returns from recess.

5. July Preliminary University of Michigan Consumer Sentiment -Friday

Two-thirds of the US economy is consumption-based so assessing consumer sentiment is crucial to determining how they feel about spending. Sentiment took a hit in May as inflation expectations rose but bounced back a bit in June and a bit more lift in sentiment is expected in August. The Bloomberg consensus is for sentiment to be unchanged in August at 81.2. Sentiment peaked at 101 in February 2020 so we still have some work to do getting back to pre-pandemic levels. Inflation expectations will be watched closely after they spiked to 4.7% in July for the 1yr outlook and to 2.8% in the 5-10yr outlook.


 

Yield Universe

 

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Published: 08/09/21 Author: Thomas R. Fitzgerald