3 days, //www.youtube.com/watch?app=desktop&v=ABWS8P6P5Kw
Yesterday’s biggest jump in the 10 yr yield since mid November didn’t happen in a vacuum. Of the 12 bps increase, 5 came from inflation expectations and I’m guessing the belief on the balance is the realization that for most, omicron is just a cold and case numbers should be rolling back down again within a month. On the Wednesday before Thanksgiving, before most of us heard of omicron that Friday, the 10 yr yield was at 1.64% vs exactly 1.64% today. The 10 yr inflation breakeven on that Wednesday was 2.62% vs 2.65% today. What’s changed from that Wednesday in November is the rise in short end rates with the 2 yr at .78% vs .64% then as the Fed has shifted as we know. Also, the 9 bps rise in the 5 yr yesterday was just about fully matched by the 9 bps increase in inflation breakevens which is back to 3% for the 1st time since that Wednesday when it was at 3.06% before a 10 bp drop that omicron Friday.
Also, the selloff in European bonds were a factor here too. I said many times that you can analyze US growth and inflation rates all you want but where European yields go will be a big influence on ours. The German 10 yr bund yield yesterday rose 6 bps to -.12% which compares to -.37% just two weeks ago. That yield is down 1.5 bps today. If you still must buy that bund having to give 13.5 bps each year, it compares with 10 yr inflation expectations in Germany of 1.81%.
5 yr Inflation Breakeven
GERMAN 10 yr Yield
In the financing environment right now if one is not a small business looking for a bank loan (it’s still tough and a personal guarantee is demanded) and instead is in search of VC or PE money, all you need still is being able to breathe and have a power point presentation. While I wish them all the best, I read in yesterday’s WSJ about the company Colossal who back in September raised $16mm, double what they were looking for. What do they do? They want to resurrect the wooly mammoth in a very Jurassic Park sort of way. They want to genetically modify the Asian elephant to do this in what they refer to as de-extinction. Here is their website if interested, //colossal.com/mammoth/ and the mammoth was considered an extinct species in 1796 according to Wikipedia. I hope they are successful as this would be interesting to see.
The Caixin December Chinese manufacturing index rose 1 pt m/o/m to 50.9 and that was better than the estimate of little change to 50 and vs 50.6 in October. Caixin said “Firms signaled the strongest increase in output for a year amid a renewed uptick in total sales. However, foreign demand remained lackluster, with export orders broadly stagnant. Improved demand prompted a fresh rise in purchasing activity, but backlogs rose again amid a further drop in staffing levels. Supplier performance meanwhile deteriorated at a softer pace, and inflationary pressures weakened. Notably, average input costs rose at the slowest pace for 19 months.” Lower steel prices were specifically cited but I’m sure lower iron ore prices too were a factor, notwithstanding the recent jump.
As for industrial commodity prices generally, the CRB raw industrials index yesterday closed within less than 1% of a record high.
CRB RAW INDUSTRIALS index
Also seen with the PMI’s, Vietnam’s manufacturing index rose .3 pts to 52.5 while Thailand’s slipped by 1.1 pts and back below 50 at 49.5.
Shifting to the European data, Germany said the number of unemployed in December fell by 23k, more than the estimate of 15k but I’m not sure to what extent the survey was done before some recent covid restrictions. Their unemployment rate fell one tenth to 5.2% which is now within just 2 tenths of its pre Covid level.
France reported its CPI for December and it rose .2% m/o/m which was half the estimate after a 4 tenths rise in November. The y/o/y rate of 3.4% was unchanged from the prior month. As energy is a big factor here, less so for France relative to other European countries because of their large nuclear footprint, the crazy moves in natural gas likely made predicting inflation in December very difficult. I mentioned earlier the move in German bund yields. Before today’s 2.7 bps drop in the 10 yr French oat yield to +.22% (yes, a plus sign), the yield last fell on December 17th and rose 26 bps in this time frame.
FRENCH 10 yr Yield