- Inflation focus again sinks stocks
- Treasury kicks off refunding operation
Inflation focus again sinks stocks — U.S. stocks sank again on Monday on continued concerns that the Fed might be forced into QE tapering and a rate hike sooner than currently anticipated due to inflation pressures. The Nasdaq 100 index on Monday fell sharply by -2.63%, and the S&P 500 index fell by -1.04%.
The 10-year breakeven inflation expectations rate on Monday rose sharply to a new 8-year high of 2.59% and closed the day up +3 bp at 2.53%. There were a variety of factors on Monday pushing inflation expectations higher, including (1) the early rally in gasoline and crude oil prices on last Friday’s shutdown of the Colonial Pipeline due to a cyber-attack, (2) a rally to record highs in copper and lumber prices, and (3) worries that wages may be going up in the U.S. labor market.
The debate continues to rage about why last Friday’s April payroll report of +266,000 was so far below expectations of +1.0 million. One theory is that wages may need to rise if the problem is that people are reluctant to return to work. Reasons why people may be reluctant to go back to work include (1) worries about Covid exposure at a new job, (2) parents who still need to stay at home to care for unvaccinated children (young children have not yet been approved for Covid vaccinations), (3) high child care costs, and (4) possibly an influence from the unemployment bonus.
Today’s March JOLTS job openings report will provide some help in determining whether job availability is really surging as much as economists believe. However, today’s JOLTS data is of limited use since it is for March, which is a month behind last Friday’s April payroll report.
The consensus is for today’s March JOLTS job openings report to show an increase of +133,000 to 7.500 million, adding to February’s rise of +268,000 to 7.367 million. The JOLTS series is already in strong shape going into today’s report. In February, JOLTS job openings were at a 2-year high and were already above the pre-pandemic level of 7.154 million seen in January 2020. The latest JOLTS figure was only 111,000 below the record high for the series of 7.574 million, which was posted in November 2018.
Today’s March JOLTS report is expected show a strong increase since Covid infection rates were down sharply in March and many businesses were allowed to reopen more fully, including restaurants, retail stores, and businesses related to travel.
Aside from labor market concerns, there are more immediate factors putting upward pressure on inflation. The Refinitiv-CoreCommodity CRB (R) index yesterday rallied to a new 5-3/4 year high, illustrating the upward pressure on commodity prices as the U.S. economy surges. Lumber and copper prices reached record highs yesterday and iron ore prices surged by 10%.
The surge in lumber and copper prices represented the tip of the iceberg as input prices are surging for many businesses due to strong demand and supply chain constraints.
In fact, the ISM prices-paid sub-indexes are surging for both the manufacturing and non-manufacturing sectors. The ISM manufacturing prices-paid sub-index in March rose by +4.0 points to a 13-year high of 89.6. Meanwhile, the ISM non-manufacturing prices-paid sub-index in April rose by +2.8 points to a 13-year high of 76.8.
The U.S. economy is showing GDP strength that hasn’t been seen in years, which is causing many different types of supply constraints and bottlenecks. The consensus is for GDP growth in the current second quarter to surge by +8.1% and to remain very strong at +7.0% in Q3, before tailing off a bit to +4.7% in Q4. The consensus is for GDP growth in 2021 to show a sharp increase of +6.8%, which would more than overcome last year’s pandemic-induced -3.5% decline.
Treasury kicks off refunding operation — The Treasury today will kick off this week’s $126 billion quarterly refunding operation by selling $58 billion of 3-year T-notes. The Treasury will then sell $41 billion of new 10-year T-notes on Wednesday and $27 billion of new 30-year T-bonds on Thursday.
The good news for the Treasury market is that the Treasury for the second straight quarter did not raise the size of its 10-year and 30-year auctions. The 3-year T-note auction has been unchanged at $58 billion for the last four months. The stable size of this week’s refunding operation should make it easier for investors to absorb the auctions even in the current climate of worries about inflation and whether the Fed might have to start tapering QE sooner than expected.
The 3-year T-note yield yesterday closed at 0.29%, which is just 2 bp above last Thursday’s 2-1/4 month low of 0.27%. The 3-year T-note yield remains pinned at a relatively low level since the market is still not expecting the Fed’s first rate hike until early 2023.
The 12-auction averages for the 3-year are as follows: 2.44 bid cover ratio, $30 million in non-competitive bids, 2.9 bp tail to the median yield, 15.6 bp tail to the low yield, and 64% taken at the high yield. The 3-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 51.5% of the last twelve 3-year T-note auctions, which is far below the median of 61.1% for all recent Treasury coupon auctions.
