Treasury prices are lower this morning, bringing pause to the recent curve flattening trend. The 2-year/10-year Treasury spread had flattened another 10 bps during the first three days of this week, leaving many market participants guessing regarding the catalyst(s) for the move.  The typical guesses include the market pricing for 1) policy error by the Fed, 2) lower inflation expectations, or 3) lower overall growth expectations (or some combination of the three).  However, none of the three would seem to justify such a strong flattening in recent weeks. Inflation and growth expectations have generally improved, and the difference between market pricing and Fed projections for the funds rate is near a five-year low. A separate theory suggests that corporations have been funding their pension funds more aggressively ahead of tax reform (i.e., maximizing deductions), and a large portion of those funds would be deployed to long-duration bonds. Additionally, the ECB’s QE tapering hasn’t yet gone into effect, so supply issues remain for German bunds, which naturally increases demand for U.S. Treasuries. Considering all of these factors, the recent flattening would seem to be more technical than fundamental, and as such, one would expect a correction (steepening) soon, although it might not come before the year is over.

Jason Haley
Managing Director, Investment Management Group

11/13Monthly Budget Statement-$59.0b-$63.2b-$45.8b
11/14NFIB Small Business Optimism104103.8103
11/14PPI Final Demand MoM0.10%0.40%0.40%
11/14PPI Ex Food and Energy MoM0.20%0.40%0.40%
11/14PPI Ex Food, Energy, Trade MoM0.20%0.20%0.20%
11/14PPI Final Demand YoY2.40%2.80%2.60%
11/14PPI Ex Food and Energy YoY2.20%2.40%2.20%
11/14PPI Ex Food, Energy, Trade YoY2.30%2.10%
11/15MBA Mortgage Applications3.10%0.00%
11/15CPI MoM0.10%0.10%0.50%
11/15CPI Ex Food and Energy MoM0.20%0.20%0.10%
11/15CPI YoY2.00%2.00%2.20%
11/15CPI Ex Food and Energy YoY1.70%1.80%1.70%
11/15CPI Core Index SA253.252253.428252.86
11/15CPI Index NSA246.646246.663246.819
11/15Real Avg Weekly Earnings YoY0.40%0.60%
11/15Real Avg Hourly Earning YoY0.40%0.70%0.60%
11/15Empire Manufacturing25.119.430.2
11/15Retail Sales Advance MoM0.00%0.20%1.60%1.90%
11/15Retail Sales Ex Auto MoM0.20%0.10%1.00%1.20%
11/15Retail Sales Ex Auto and Gas0.30%0.30%0.50%0.60%
11/15Retail Sales Control Group0.30%0.30%0.40%0.50%
11/15Business Inventories0.00%0.00%0.70%0.60%
11/15Total Net TIC Flows$75.0b-$51.3b$125.0b$130.2b
11/15Net Long-term TIC Flows$80.9b$67.2b$73.2b
11/16Initial Jobless Claims235k249k239k
11/16Continuing Claims1900k1860k1901k1904k
11/16Philadelphia Fed Business Outlook24.622.727.9
11/16Import Price Index MoM0.40%0.20%0.70%0.80%
11/16Import Price Index ex Petroleum MoM0.20%0.10%0.30%0.40%
11/16Import Price Index YoY2.50%2.50%2.70%
11/16Export Price Index MoM0.40%0.00%0.80%0.70%
11/16Export Price Index YoY2.70%2.90%2.80%
11/16Industrial Production MoM0.50%0.90%0.30%0.40%
11/16Capacity Utilization76.30%77.00%76.00%76.40%
11/16Manufacturing (SIC) Production0.60%1.30%0.10%0.40%
11/16Bloomberg Consumer Comfort52.151.5
11/16Bloomberg Economic Expectations5347.5
11/16NAHB Housing Market Index677068
11/17Housing Starts1190k1127k
11/17Housing Starts MoM5.60%-4.70%
11/17Building Permits1250k1215k1225k
11/17Building Permits MoM2.00%-4.50%-3.70%
11/17Kansas City Fed Manf. Activity2123
11/17MBA Mortgage Foreclosures1.29%
11/17Mortgage Delinquencies4.24%