Halyard’s Weekly Wrap – 2/9/24 – Bond market hears Fed’s message on being patient ….Stocks rally further.

As expected, with the light economic data calendar, volatility driven by data this week was nearly nonexistent.  Instead of trading on economic data, traders focused on the plethora of Fed member speeches, 15 of them, with a Fed speaker hitting the tape every day this week.  The message was consistent, reflecting Chairman Powell’s comments that the Fed is likely to cut rates this year, but not imminently.  There was also some limited discussion about the effect seasonality could have played in the outsized January employment report.  The problem with that discussion is that they don’t want to call the integrity of government reporting into question for many reasons.  The primary one being if the data is flawed and they are making decision on flawed data then, inherently, the decision is flawed.  As the rates market realized that the Fed might not be as early and as aggressive as it thought, yields rose with the intermediate sector of the yield curve suffering the largest increase.

The U.S. Treasury department completed their 3-part offering of notes and bonds this week and the concern that they would meet tepid demand was clearly not an issue.  Both the 10-year note, and the 30-year bond traded through the yield level at which they were trading at auction time.  That’s to say that bidders paid up to ensure they got their required allocation.  Somewhat perplexingly though, typically when an auction trades through at auction time, there is usually a follow-through to the upside in price.  That wasn’t the case in either auction.  Instead, prices drifted lower in the afternoon of both auctions.

Each year the BLS releases a revision of monthly CPI for the last five years and market-watchers had been concerned that this morning’s release would show an outsized revision.  That worry was for naught as the revisions were minimal.

Next week will be much more data rich than what we saw this week. On Tuesday, the BLS will release the CPI for January.  Despite the Fed’s success in lowering the PCE price index (2.0% yoy), CPI is the measure of inflation most watched by the public and reported on by the media.  CPI ex-food and energy is expected to rise to 3.9% from 3.7% in December. An inflation print of 3.9% coming on the back of last week’s blockbuster employment report will take any hope of a March rate cut off the table.

In addition to CPI, the government will release the Retail Sales report on Thursday.  The expectation is that sales will cool from the torrid pace at which they closed the year.  Rounding out the week is housing start data, PPI and the University of Michigan surveys.  In total, next week’s data dump should give investors an updated snapshot of the state of the economy.