Rising oil and bond yields enter the inflation group chat: Morning Brief

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Wednesday, September 29, 2021

Suddenly, rising oil prices and falling bond prices make DC’s messy chores harder

Two big trends collided on Tuesday and managed to kill two birds with one stone. Commodity bulls and bond vigilantes have teamed up to shake up a market that has become too complacent with the status quo, and sent a clear message to Washington’s ever-arguing establishment.

Ahead of DC’s deadline to avert a federal government shutdown and a self-imposed debt ceiling, a bond sell-off accelerated, leading to a loss in stocks and a surge in interest rates.

The heating up of the toxic brew is the price of oil (CL = F) which is apparently preparing for a surge of over $ 80 a barrel, especially with such high global demand. Energy bottlenecks in China and Great Britain underscore how fuel price peaks are being reflected in industrialized countries.

The market moves could not have come at a worse time as the US Federal Reserve carefully calibrated market fears about both rising prices and restricting its massive bond purchases until next year.

And some believe the former is increasingly affecting the latter – which is in part why bond investors seem to be forcing the hand of the government.

“Inflation expectations are finally catching up with inflation and the drama in Washington,” Gene Goldman, CIO at Cetera Investment Management, told Yahoo Finance on Tuesday, who argued that the Fed “grossly underestimated the severity of inflation.”

In terms of rising prices, “temporarily” has become the epitome of pandemic-era central bank policy. The Fed believes that much of the pressures driving inflation will eventually ease.

However, Goldman argued that “the eventual landing site” [of inflation] will be above pre-pandemic and Fed targets. ”In August, headline prices were above 5% while core prices were not far behind.

“If inflation has been as transitory as the Fed is suggesting, year-over-year inflation shouldn’t be as high,” Goldman told Yahoo Finance in an email.

“Since the throttling is the first step in removing the incentives and the Fed does not want to expand its balance sheet while raising rates, the Fed will most likely begin the throttling as soon as possible (November) to keep it going Rising inflation can deal with higher interest rates faster, ”added the investor.

In the last week alone, the benchmark 10-year Treasury gained around 20 basis points, while the inflation-sensitive two-year yield rose to its highest level in over a year, according to Marc Chandler, chief market strategist at Bannockburn Global Forex.

Interest rates have risen sharply in the past two weeks.

And with returns still too low relative to US economic growth, Cetera’s Goldman believes the 10-year mark could break the psychologically important 2%.

As if containing the inflation kite wasn’t enough work, the specter of government stalemate – or worse, default – makes the outlook much worse. Treasury Secretary Janet Yellen has warned Congress that the debt ceiling must be raised or suspended by October 18.

While almost no one expects Uncle Sam to stop paying their bills, Washington’s very partisan atmosphere is enough to give investors a serious gut check, especially since technology- and growth-sensitive stocks are sensitive to rising interest rates.

“Beneath the surface of the stock market, long-term growth stocks have deteriorated in line with historical pattern due to rising interest rates,” Goldman Sachs analysts wrote on Tuesday. “Rising interest rates pose a greater risk to long-dated stocks valuations given the high proportion of cash flows expected in the distant future. “

from Javier E. David, Editor at Yahoo Finance. Follow him up @Teflongeek

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What can be seen today

business

  • 7:00 am ET: MBA mortgage applications, Week until September 24th (4.9% in the previous month)

  • 10:00 a.m. ET: Upcoming home sales, Previous month, August (1.3% expected, -1.8% in July)

Merits

politics

  • President Biden canceled a trip to Chicago today to work the phones in an attempt to save its economic agenda. The bipartisan infrastructure law and the multi-trillion dollar reconciliation package are on the brink.

  • On Capitol Hill, less than 48 hours before a government shutdown, lawmakers remain bogged down after the key moderation Senator Joe Manchin (D-WV) says he made “no obligations” a package of reconciliationleading to what some call a liberal revolt against the plan US House of Representatives Speaker Nancy Pelosi to Vote on the separate infrastructure law this week.

  • The inaugural meeting of the US-EU Trade and Technology Council, chaired by the USA, will also take place today in Pittsburgh Trade Minister Gina Raimondo and other members of Biden’s cabinet. The Council will speak on “the broadening and deepening of transatlantic trade”.

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