A Time to Remember

Good morning, everyone. Equities and risk assets continue to claw back short term. Yet, at the same time, the US rate market remains firm. Off the 2018/2022 highs in yield for 10-year UST, we now battle the 2.70-2.72% area which has been tested and failed multiple times. Volatility remains high, yet declining. And the Federal Reserve highlights liquidity this week in the FOMC Minutes. After months of bearishness, earlier this month we were vocal about adding duration close to 2018 yield levels.

US Treasury Move Index: Volatility has been declining

UST 10-year

Let's Take a Look

The Fed's PCE on the screws. Core YOY at 4.9% v 5.2%. Personal spending held in slightly stronger. Despite the inflationary pressures there's still pent-up demand (pandemic) as we head into the summer. The shift from goods to services. The back half of 2022 is where the economy will be tested. Thus, the focus now on the September Fed meeting. Our?chart of the day?below,?Michigan Sentiment, back toward the lows seen in the Global Financial Crisis. Thus far, spending has held up in nominal terms.?

The US rate market remains firm. We've highlighted 10-year UST off the 2018 highs around 3.25% and testing and failing multiple times recently 2.70-2.72%. Big gap toward 2.50% if we break, and we've favored longs off the 3.20% area earlier this month.

The Upcoming Week

Looking ahead next week: ISM, JOLTS, Beige Book, and NFP on Friday the highlight. The Fed will move into their blackout period next week ahead of the June 15th meeting with a very well-advertised 50-basis point move. The final Fed speak next week: Williams, Brainard, Bullard and Mester. All voters. Nothing in today's numbers changes the current Fed pricing short term (June meeting and likely July). In a nutshell, the Fed wants to get their perception of neutral in sight (2-2.50%). It is all about what happens to the data heading into the September meeting over the summer. We will join Fox Business on Wednesday at 7am to discuss.

On the ground today:

Lots of talk of the "pause" from the Fed. Ultimately, the choices are not great:

1) Hit the brakes strong and risk a hard landing. 2) Or play catch up, temper and play the long game in fighting inflation.

Powell has alluded to the long game. The Bullard scenario of 3.5% by year end is not preferred. Ultimately, that may wind up being the terminal end game, but the speed and pathway will matter for the economy and markets.

Our?chart below; 5y, 5y inflation breakeven rates. Well of their highs with a trajectory lower and within sight of the Fed's 2% target. Gives the Fed some breathing room.

"Our flag does not fly because the wind moves it. It flies with the last breath of each soldier who died protecting it."

Have a great, safe and thoughtful weekend!