My friends at Quill Intelligence included a great quote in their weekly piece yesterday that is perfectly suited to the dilemma the Federal Reserve and current fiscal authorities in Congress face however self imposed, and it comes from Alden Clausen in 1974 who was president and CEO of Bank of America. “We might as well be realistic. No government anywhere is going to step on monetary and fiscal brakes to the degree necessary to fully curb inflation of this order because of the inevitable jolt to the economic system.” If he said this today I’m sure he would have added to that last sentence “and the financial markets.”
Until they do, it seems that the bond market is going to do it for them. The 2 yr yield is now up 14 bps on the week to .54%, the highest since early March 2020. The 5 yr yield today is rising to the highest since February 2020 at 1.25%, up 20 bps this week with another fresh high in the 5 yr inflation breakeven now at 3.10%, up 21 bps since last Friday.
2 yr YIELD
5 yr YIELD
NY Fed president John Williams, an always dove, speaks today at noon. He last spoke at the end of September and said this on inflation, “As the economy gets through these highly unusual dynamics, I expect inflation to come back down to around 2% next year. One reason I expect inflation to moderate is that measures of underlying inflation and longer term inflation expectations have been relatively stable during this period of otherwise volatile inflation readings.” We’ll see if he still thinks this even though the evidence and data point otherwise.
Nikkei news is reporting that the new Japanese government is putting together a fiscal package that could total more than 40 Trillion yen (about $350b). About 30 Trillion will be fresh spending and “including local government contributions and fiscal investment and loans, the total size is expected to exceed 40 Trillion yen.” For comparison, Japan spent 48.4 Trillion yen from a package passed in April 2020. In April 2009 at the trough of the US housing driven recession, they spent 15.4 Trillion. A trillion here, a trillion there and if I had a yen for every fiscal spending package out of Japan over the past 30+ years, I’d have a lot of yen. The Nikkei did rally 1.1% and the 10 yr inflation breakeven is up for the 7th day in the past 8. Nominal yields though are little changed as is the yen.
The only thing of note overseas was the Eurozone industrial production figure for September which fell .2% m/o/m, better than the forecasted drop of .5%. It’s still up 5.2% y/o/y and we know full well the factors that are inhibiting the production and shipment of just about everything. The euro is flat but at the lowest since July 2020 vs the US dollar. We know the ECB will lag by a large amount the trimming of their QE relative to the Fed. That said, it is the US that has the very large trade and budget deficits and rates of inflation.