Axios Markets: Tug of war

Plus, Why Southwest is leading the return to the skies | Friday, May 07, 2021

Open in app View in browser   Presented By Canadian Pacific   Axios Markets By Dion Rabouin ·May 07, 2021 Happy Female Friday! As we've done every first Friday of every month for the past two-and-a-half years (with a couple of exceptions) today's newsletter features commentary exclusively from women. It's just a little reminder that we can all be a bit more inclusive in what we do. Was this email forwarded to you? Sign up here. (Today's Smart Brevity count: 890 words, 3.4 minutes.) 🚨 Heads up! I'll be off next week on vacation. Aja Whitaker-Moore will be in your inbox. I'm not going anywhere special, but feel free to follow me on Twitter if you miss my market commentary during the week. And Mother's Day is this Sunday. Don't forget! 🎙 "Woman is born free and remains equal to man in rights. Social distinctions may be founded only on the common good." - See who said it and why it matters at the bottom.     1 big thing: The bond market's tug of war over inflation Illustration: Eniola Odetunde/Axios   Investors are picking sides in a battle happening in the bond market that is seeing inflation expectations surge higher but nominal U.S. Treasury yields remain low and anchored in a tight range. Why it matters: The disconnect between inflation expectations and the Treasury market could be driving much of the risk-taking behavior in assets like stocks, cryptocurrencies and commodities. Break it down: Real yields — the yield on U.S. government bonds minus inflation — fell to an 11-week low this week and are headed back toward their all-time low close. The lower real yields fall the more investors are inclined to move further out on the risk scale in a search for yield, so they can generate positive returns for their clients. What's happening: While more money has plowed into stocks this year than over the last 12 years combined, investors also are buying record amounts of inflation-protected bonds (10 times the quarterly average of the past 20 years in Q1). "Real yields are at all-time lows, so it's really sort of a question of here and now the market pricing in all of these supply pressures," Subadra Rajappa, head of U.S. rates strategy at Société Générale, tells Axios. "I'm just not sure the market has fully bought into this narrative from the Fed that rising inflation will actually be transitory." The big picture: Inflation has become the biggest worry among market participants and a growing discussion topic among American families who are seeing prices rise across the board. But expectations for continued price increases are no longer being reflected in the all-important Treasury market. Normally, investors sell bonds as inflation measures rise because it erodes the value of already-held bonds, but perhaps because of guidance from the Fed and chair Jerome Powell the opposite has happened. By the numbers: The 5-year breakeven rate (a measure of investors' inflation expectations over 5 years) rose to 2.66%, its highest since a spike in July 2008 and about 30 points from the highest levels ever recorded in the data series. 10-year breakeven rates are at their highest levels in more than 8 years and 30-year breakevens are at the highest since September 2014, according to Fed data. But since the end of March, yields on the benchmark 10-year Treasury note have fallen by 18 basis points to 1.57%. The bottom line: "There's a tug of war within the market as to not just whether or not current price increases are transitory," says Quincy Krosby, chief market strategist for Prudential Financial. "But even if it is, how long does it last?"     Bonus chart: Inflation expectations versus Treasuries Data: FRED; Chart: Dion Rabouin/Axios Visuals Kathy Jones, chief fixed income strategist at Schwab, says she's not expecting double-digit inflation spikes as the U.S. saw in the 1970s, however, "I do think we could land at a higher level of inflation than we've had in the past," she tells Axios. "Instead of limping along at 1.5% as we've done over the past decade, we could land at 2.5% or land at 3%." Why it matters: That may not seem like much, but it would mean the current rate of price hikes continues and would represent the highest inflation the country has seen in at least 25 years.     2. Catch up quick South Carolina ordered the termination of the state's participation in all federal, pandemic-related unemployment benefit programs, joining Montana and following Arizona, Florida and Kentucky, which have said they're reinstating full work search requirements for people who receive unemployment benefits. (Axios) The Fed warned in its latest Financial Stability report that rising asset prices are posing increasing threats to the financial system and prices may be vulnerable to significant declines. (CNBC)     A message from Canadian Pacific One railroad connecting U.S.-Mexico-Canada     A Canadian Pacific transaction offers greater certainty for stockholders and creates more rail competition for shippers. Remaining the smallest Class 1 railroad, a combination with CP appropriately manages regulatory risk and creates significant benefits for customers and stakeholders.     3. Decline in unemployment claims bodes well for jobs report Data: Department of Labor; Chart: Axios Visuals First-time unemployment claims fell again, the Labor Department reported Thursday, with seasonally adjusted claims falling below 500,000 for the first time since March 2020, and unadjusted claims showing a decline of more than 107,000 from the previous week. Why it matters: It's the latest sign of a strengthening labor market and could set the stage for a big jobs report today. What we're hearing: Economists like the Jain Family Institute's Claudia Sahm and Jefferies' Aneta Markowska expect the report could show more than 2 million jobs were added last month. Yes, but: Wednesday's ADP private payrolls report missed expectations, coming in at 742,000 jobs added, well below expectations for 896,000. Similar employment metrics like the ISM and IHS-Markit surveys did not show blowout job gains last month. Watch this space: "In this era, there's been more uncertainty than ever before, so I wouldn't hang my hat on any number," former Department of Labor chief economist Heidi Shierholz tells Axios. Still, Shierholz, now senior economist at EPI, is expecting, "We will get a strong number... things will look good." By the numbers: The April nonfarm payrolls report is expected to show 975,000 jobs were added, which would be the highest print since August's 1.58 million. The unemployment rate is expected to fall to 5.8% and average hourly earnings are expected to be unchanged from March (and down 0.2% year over year) after last month's 0.1% contraction. That was driven by an increase in lower-paying jobs in the service industry returning.     4. Americans' return to the skies could benefit smaller airlines Data: CivicScience; Chart: Axios Visuals Americans are slowly getting ready to fly again, with 44% of U.S. adults now saying they plan to fly in the next six months, data from CivicScience show. That's a 1 percentage-point bump from March and an 8 percentage-point increase from September. However, it's still well below pre-pandemic levels. The intrigue: Despite the overall increase in intent to fly, 3 of the 4 major U.S. airlines saw a decline in the number of respondents who said they expected to fly with that airline. This could signal increased interest in using smaller carriers like Southwest, CivicScience notes. It also suggests that customers remain more comfortable with airlines that left middle seats open during the pandemic.     A message from Canadian Pacific One railroad connecting U.S.-Mexico-Canada     A Canadian Pacific transaction offers greater certainty for stockholders and creates more rail competition for shippers. Remaining the smallest Class 1 railroad, a combination with CP appropriately manages regulatory risk and creates significant benefits for customers and stakeholders.   Thanks for reading! Quote: "Woman is born free and remains equal to man in rights. Social distinctions may be founded only on the common good." Why it matters: On May 7, 1748, playwright and revolutionary Olympe de Gouges aka Marie Gouze, was born. Gouze was an abolitionist and feminist who spoke out against slavery in the colonies. She is best known for her work as the author of the Declaration of the Rights of Woman and of the Female Citizen. In November 1793, two years after its publication, she was arrested, tried and executed for treason during the Reign of Terror. ************** This newsletter is written in Smart Brevity®. Learn how your team can communicate in the same smart, clear style with Axios HQ.   Axios thanks our partners for supporting our newsletters. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Suite 1300, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: