Transcription
So I'm really worried that what we're seeing in the equity market is going to accelerate. We haven't seen a breakout of yields to these levels in quite some time. And that 5% level for the long bond that matters. And it has in the past for equities. So I'm I'm keeping an eye on what happens in the stock market today.
Frankly what is pushing uh rates higher. Again you mentioned that the 30 year at 5.10%, that really gets people's attention. The ten year at 455. That breaks out a little bit. What's going on there? Well, I think we're still trading the conflict in the Middle East. We're still worried about the energy complex. We're coming off of a series of inflation prints that have demonstrated that we're already starting to see some pass through the core. There were a few technical adjustments from the BLS that propped up the core numbers, so we weren't particularly surprised or worried. But the market clearly is. And we just went through the ten and 30 year auctions. And so they're still in the process of being redistributed. And as we have seen in the run up to pretty much every weekend, we're worried about the event risk of those two days in the Middle East because frankly, anything can happen. You don't want to hold a risk position over the weekend, except.
I mean, this is telling me I'm an equity guy. So but, you know, I try to stay away from the bond market, but when I see rates move higher like this, it just shows me angst in the marketplace. It and I guess the angst is more persistent, more stickier inflation. Is that what we're seeing? I think that's part of it. There's also a fiscal concern. Okay. So the inflation argument is fed into by the eye, by the notion that the labor market remains on solid footing. We had a higher than expected but still low initial jobless claims number. We inflation is moving along fine but not to the levels that are troubling. Yet if the unemployment rate had been materially higher where we hadn't had strong payrolls, I think we'd be in a much different macro environment. Ian Lincoln, with its BMO Capital Markets, he's taking every trophy there is in fixed income. His note dense and extremely red on the morning hours. Get that from the Bank of Montreal, BMO Capital Markets, BMO Capital Markets.
So I look at the real yield. There's a number of ways to look at this. I've seen a leap year from a 190 year to a 2.04. I got some history at 2.11. What are the ramifications if the ten year real yield breaks out to new territory? Well, I think that it depends on how that occurs. If it occurs with a compression of break evens because inflation expectations have moderated. Then I think that the the real economy can absorb that in it's a more buoyant economy, productivity innovation than that. But if it's a flip side and you see a widening of a break evens and higher real rates, that is a vote of non-confidence over treasuries. As now, nicely explained though, you're a grizzled pro at this. He's got three Bloomberg I see it I know. I mean 2012 revert darkens when he tunes in as his Bloomberg okay, so you've got a bond market complexity. And the answer is there have to be trip points. What's the Ian Lyngen trip point? Is it? The five year yield. The ten year yield? Is it something esoteric?
Well, I think that the world looks at ten year yields. I look at the two year yield as nothing more than reflection of near-term monetary policy expectations. And so anytime we're over 4% in this environment, that means that we're really contemplating rate hikes, which I don't think should be on the table. The long bond is more of an inflation story. And as we see, five handle on the 30 year is troubling for a lot of different asset classes. So I do think that the shape of the curve is going to be the the story to follow this year. Kevin Warsh give me stepping into the big chair at the fed. It's going to be a little uncomfortable given some of the data we're seeing here. I mean, what do you think the messaging that's going to come out of this new fed chair will be should be because we're going to hear from in the next few days, probably.
So he has been given a very difficult fed to take over at the moment. Powell still going to be in the room you have. He's coming in with three dissents against some of the language within the statement. It's interesting that the distance we're against the language and not against the move itself, as is typically the case. I suspect that he's going to have a very hard time building consensus over the summer to do anything outside of potentially scale back some of the forward guidance. Normally, I would say is one of his objectives is to talk less in terms of being a fed leader. And that could mean at some point reduced in the the CEPs or the Dot plot. But I don't think anything's happening. I mentioned this earlier, Governor Myron on yesterday, Farrell grilled him. I thought John did a great job. Uh, and and the interview and the distinction there is the inflation. Not so much a one off, but is it various supply side, even demand side shocks, or is there a fiscal persistency finally to it? How do you pass that?
When you look at the dynamics of the Ian Lincoln bond market, it does feel as though forward inflation expectations are moving higher for the average consumer and the average household. And that's what the fed needs to worry about, because you can drill down into CPI and you can see that in April core goods were effectively flat. And that's what everyone was worried about last year this year. So we're beyond the tariff story. But now we're worried about airfares, energy prices right through to products at the end of the day. But that takes months to actually zero. I get a nice summary of the Goldman Sachs note, where they triangulate out to a 4.60% ten year yield being important. Do you have in your head that trip point on the ten year where things change for the stock market? I would say that we're right up against it. I would say for 75, but right now we're just chopping around in a range that is reasonably well defined. And again, we're the level of conviction that is in this market is so low right now when we talk to clients and make the rounds. People just don't know in in fixed income space.