Treasury Yields Drop as Anticipation of a Growth Slowdown Overtakes Inflation Fears

Markets are whipsawing back and forth between worrying about stubborn inflation, recession, or both- stagflation. The conundrum is partially a result of Fed policy. Remember, the Fed’s toolbox consists of “hammers not scalpels.” The central bank is not able to fine-tune or tweak sections of the economy. Instead, it’s interest rate increases are macro-monetary policy moves that affect capital markets, personal finance, consumer behavior, etc., on a large scale. Much of today’s inflation is due to a massive supply shock, as manufacturing and logistics underwent disruption due to COVID. So, the Fed’s “hammer” is to create a demand shock by raising interest rates. Example: Existing home sales volume is plummeting as mortgage rates spike (the 30-year fixed mortgage rate has spiked to over 6.00%, up from about 3.10% last year). Also, there are signs that gas prices have actually dropped slightly in recent days. Markets are looking at this as “good news and bad news” as high prices and increased interest rates are causing consumers to curb purchases. The 10-year Treasury hit 3.50 on June 14 on the narrative that inflation was possibly out of control. Today, it is at 3.16% on slowdown fears. No matter what, the focus will be on the data over the next couple of weeks. This week will include jobless claims and consumer sentiment. Next week will include durable goods and Thursday’s big PCE release. Stay tuned… By David R. Pascale, Jr. , Senior Vice President at George Smith Partners