Inflation Fears Resurface as Treasury Yields Soar

Long-term Treasury yields and market-based expectations of inflation have experienced a sudden surge, raising concerns about rising inflation.

According to Tradeweb data, yields on 10- and 30-year Treasury inflation-protected securities reached their highest levels in over a decade on Thursday. This increase was accompanied by a rise in 10- and 30-year Treasury yields, which are heading towards their highest points in 2023.

A multitude of factors may be contributing to this trend, with one of the primary factors being the continued strength of the U.S. economy and labor market.

Economists have pointed to the better-than-expected private-sector employment report released on Wednesday as evidence. The report revealed that the U.S. added 324,000 jobs in July, leading to a fine-tuning of expectations for Friday's monthly jobs report. It is important to note that the private-sector reading does not consistently act as a reliable predictor.

According to The Wall Street Journal's survey of economists, it is expected that July's nonfarm payrolls report will show a gain of 200,000 jobs, which is only slightly different from the actual gain of 209,000 jobs seen in June.

The release of this strong economic data coincides with heightened scrutiny of the U.S. fiscal outlook. This comes as the Treasury plans to borrow $1 trillion in the third quarter and Fitch Ratings downgraded the U.S. government's debt rating.

Lindsey Piegza, the chief economist of Stifel, Nicolaus & Co. in Chicago, believes that the downgrade is not significantly impacting the curve. Instead, the selloff in the Treasury market on Thursday, which led to higher yields overall, reflects a labor market that is tighter than anticipated. Additionally, expectations for Friday's report have increased due to rising expectations for the economy and inflation.

Investors React to Potential Changes in Federal Reserve Rates

Investors are closely analyzing recent data to assess the possibility of changes in Federal Reserve rates. According to Piegza, it has taken some time for the market to fully understand the Fed's latest commentary on the need for further policy firming to control inflation. However, this perception has shifted since ADP's report on private sector employment growth. Investors are also considering factors such as rising gasoline prices and recent actions taken by the Bank of Japan and European Central Bank.

Hope for the U.S. Economy

Investors have been cautiously optimistic about a soft-landing scenario for the U.S. economy, where inflation decreases without causing a recession or significant increase in unemployment. Inflation data from the past year has supported this view, with the annual headline rate on the U.S. consumer price index falling to 3% in June from a peak of 9.1% a year earlier.

Uncovering Economic Expansion

However, recent data reveals that an important sector of the U.S. economy is still growing, as shown by a measure of business conditions for service-sector companies from the Institute for Supply Management. This finding raises questions about how much further inflation can realistically decline to reach the Federal Reserve's 2% target.

Reconsidering Inflation Trends

The increase in the prices paid component of the ISM Service Sector report challenges any notion that inflation is continuing to cool off rapidly. Additionally, gasoline prices have reached an eight-month high across the country. Quincy Krosby, Chief Global Strategist for LPL Financial, emphasizes the significance of the upcoming payroll announcement, as financial markets will closely monitor wages.

Overall, investors are navigating through a complex economic landscape and closely monitoring various factors that may impact Federal Reserve rates and inflation trends in the U.S. economy.

Treasury Yields Reach Year-to-Date Highs

10- and 30-year yields surge to 4.17% and 4.3% respectively

The 10- and 30-year Treasury yields reached impressive year-to-date highs on Thursday. Trading at 4.17% and 4.3% respectively, these rates reflect a significant upward trend. According to Tradeweb, the 10- and 30-year TIPS rates surged to their highest levels in over 10 years, standing at 1.804% and 1.984% as of 12:30 p.m. Eastern time.

Stock Indexes Attempt a Comeback

DJIA, SPX, COMP aim to recover after Wednesday's decline

As Treasury yields soared, all three major U.S. stock indexes - DJIA, SPX, COMP - were determined to bounce back from the sharp fall experienced on Wednesday. Despite the setback, these indexes show resilience as they strive to regain stability and resume their upward trajectory.