Higher interest rates are back after the 10-year Treasury yield crossed above 3.3% last week as it closes in on the mid-June high of 3.5%. The impact has been felt particularly in the stock market as valuations have been dinged and bonds continue to accrue losses. The Bloomberg U.S. Aggregate Bond Index is now down roughly 11.5% year to date. This has been a pain point for investors utilizing bonds for their defensive characteristics. That said, yields are more productive at these levels.
Longer-term Treasury yields have traded closely in line with the inflation and rate hike narratives in 2022. Just when investors thought they might find relief in some encouraging signs on the monetary policy front, the Jackson Hole speeches by Federal Reserve (Fed) officials crushed those hopes for a dovish policy pivot. Fed officials are using the high inflation era of the 1970s and early 1980s as a cautionary tale for what happens when they take their foot off the gas of the inflation battle too early.
What we saw during that time period were dovish pivots in reaction to economic growth concerns and optimism regarding inflation only to see inflation rage higher and the Fed reignite overly restrictive policy measures, ultimately leading to reoccurring recessions over that time period. Today’s Fed officials are determined not to fall into this cycle and this time have history as a teacher.
This week will give officials another crucial data point as the August Consumer Price Index (CPI) report will show what happened to prices after a leveling off in July. U.S. stock markets already began their rally last week in anticipation of a favorable reading.
A look back
- U.S. stocks reversed a three-week losing streak as they increased nearly 3.7% last week. International developed (+0.9%) and emerging market stocks (-0.1%) continue to lag this year.
- The 10-year U.S. Treasury yield moved up 0.11%, marking the sixth-straight weekly increase. The 2-year yield was up 0.15% further inverting the 2/10-year yield curve.
- The European Central Bank took a page out of the Fed playbook as they raised their benchmark lending rate by 0.75%.
A look ahead
- The August Consumer Price Index (CPI) report will be released this week. Consensus estimates are calling for 0.1% decline in prices month over month, improving on July’s flat reading.
- Retail sales will be reported this week helping investors keep an eye on the strength of the U.S. consumer. Tight labor markets continue to support the consumer.
- Economic releases: Consumer & Producer Price Indices, Retail Sales, Univ. of Michigan Sentiment, Philadelphia Fed Business Outlook.
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