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Tag Archives: financial markets

August CPI – Nowcasts

The CPI release for August numbers is tomorrow. As of today, here are the Cleveland Fed nowcasts for CPI and Core CPI: Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (red triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations. Inflation...

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Messages from the (Bond) Market

Today, the CEA published a blogpost on how the administration’s infrastructure and Build Back Better plans won’t be inflationary. I think it’s of interest to see how the market (which will undoubtedly turn out to be wrong) thinks inflation and output will evolve. For medium term inflation expectations, I look to the five year inflation breakeven, and the expected inflation over the next five years as inferred using the breakeven and additional survey and market information. Figure 1: Five...

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Forecaster Views on the Overheating Hypothesis

Earlier in the year, one fear was that excessive fiscal stimulus would push up inflation, push up long term yields. Professional forecasters don’t seem to view that outcome as imminent. Figure 1: Ten year constant maturity Treasury yields (black), CBO (red), Administration (blue), Survey of Professional Forecasters August (teal), and WSJ July (gray x). WSJ rates pertain to end-of-quarter. Dates in graph pertain to forecast finalization of forecasts. Source: CBO An Update to the Budget and...

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Market Inflation Expectations and Real Rates

Is the inflation scare bubble over? As of yesterday, the five year inflation breakeven was 2.5%, down from 2.72% in mid-May. The estimated inflation risk and liquidity premia adjusted 5 year breakeven was 1.62% as of 7/30 (when the corresponding actual breakeven was 2.56%). Figure 1: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), all in %....

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Forecasted Ten Year Interest Rate Trajectory Declines

From WSJ surveys: Figure 1: Ten year Treasury yields (black), WSJ October 2020 survey (red square), January 2021 (blue triangle), April 2021 (teal triangle), and July 2021 (pink square), all end-of-quarter, %. Source: Fed via FRED, WSJ surveys. Placing the forecasts in context, the July forecast for June 2022 is the same as the median value from the Survey of Professional Forecasters, and only slightly above the CBO’s June forecast. In this sense, the forecasts are not too dissimilar for...

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Public Service Announcement: Real Rates Are (Still) Low

If demand is so high, why are real rates so low (even admitting Fed QE, forward guidance, etc.)? Figure 1: Ten year Treasury yield, % (blue), ten year TIPS yield (black), ten year yield minus ten year expected CPI inflation (median) (red +), all monthly averages of daily data, %. July 2021 observation is average of daily date through 7/13. NBER defined recession dates shaded gray, except for last recession assuming trough at April. Source: Federal Reserve via FRED, Survey of Professional...

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How Much of US Federal Debt Is Held by Foreign/International Investors

As a share of debt held by the public (i.e., excluding intragovernmental holdings). Figure 1: US Federal debt held by foreign & international investors as share of Federal debt held by public. Source: FRED and author’s calculations. The recent decline in the ratio arises due to the large increase in total debt held by the public (held by the public includes Fed holdings).

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Real Borrowing Costs for the US Treasury: May 2021

As of May 2021, the nominal 10 year Treasury rate is 1.6%. The real rate is -0.9%. Figure 1: Nominal 10 year Treasury yield (blue), 10 year TIPS (red), both in %. NBER recession dates shaded gray; latest recession assumed to end 2020M04. Source: Federal Reserve via FRED, Treasury, and NBER. It’s noteworthy that — despite the runup in real and particularly nominal rates — May 2021 real rates are still below anything experienced in the the recovery from the Great Recession, and only slightly...

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The Employment Surprise and Bond Yields

Given the employment surprise (NFP 266K actual vs. 978K expected), it would be remarkable if interest rates did not respond. Stock indices did drop, then recovered to pre-surprise trend. Five year bond yields did drop somewhat. Figure 1: Treasury five year constant maturity yield (blue, left scale), and TIPS five year constant maturity yield (red, right scale). Source: Treasury via FRED. Both nominal and real yields fell with the surprise, so that the simple inflation breakeven fell one...

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