It doesn’t take a rocket scientist to realize that 2016 is starting almost identically to 2015. As you recall, the 10yr dropped 60bps in 30 days at the beginning of 2015 to fall all the way down to 1.64%. In 2016 it took 40 days for the 10yr to drop 60bps down to 1.65%. In 2015, the 10yr popped back up to average around 2.00% in the following 3 months. So far in 2016 the 10yr is hovering around 1.75%. In fact for the past two weeks we have seesawed back and forth above and below 1.75%. Too good to be true?
Inflation via Core PCE was reported today at an annual rate of 1.7%. In short it measures the components of GDP related to increases in prices, excluding food and energy. Inflation is getting closer to the 2.0% Fed target, but still below nonetheless. By the way, GDP grew at an annual rate of 1.0% in the 4th quarter, above expectations but still below the Fed’s target. However if I’m at the Fed, I would say this is an encouraging sign and especially for the 4th quarter, which is typically slow. That has adjusted the market’s expectation of a Fed move. The odds of the Fed raising rates by year end have moved up to 54%. The odds of a hike next month are 12% as of today. Just because the Fed doesn’t move, doesn’t mean the market won’t.
Today Oil trades at $33/barrel versus the low of $26 earlier this month. The People’s Bank of China said they plan to use monetary policy to limit any further yuan depreciation. Without any further turmoil in Oil or China or the US, can the market stay at these levels?
With today’s figures on GDP and PCE I think there is some risk that rates could move higher. If China and Oil are stable from here and the United States continues to show strength the low rates of 2016 could be behind us soon. However we are one world event, one bad piece of economic data, one report away from the 10yr returning right back to 1.65%. While the PCE and GDP figures are great news for the economy there is some underlying information in the data that is concerning such as inventory accumulation, business investment, exports, income growth, etc. Sometimes headlines can be deceiving so watch out.
I would expect some volatility coming soon given how far the market has moved over the past two months and how consistent it has been for the past couple of weeks.
10 year US Treasury: