Canary In The Coalmine? | Daily Market Update

Wednesday, July 14, 2021

Top Story

Canary In The Coalmine?

  • The 10-year Treasury yield’s fall of over 40 basis points (0.40%) has many investors asking if the bond market is signaling bad news about the economic recovery.
  • The absence of a negative signal from credit markets gives us some comfort that the move lower in rates has been mostly technically driven.
  • We think the move lower in yields is largely due to repositioning of portfolios, as well as foreign interest in the U.S. Treasury markets.
  • These technical pressures on yields are independent of the fundamental story, which suggests the economy continues to grow strongly.

For more on our views on what, if anything, the recent decline in long-term Treasury yields is telling us about the economic recovery, please see today’s LPL Research Blog, live at noon ET.

Daily Insights

US equities trade higher in early trading amid the start of a very busy earnings season

  • The Nasdaq composite opened higher as growth names continue to show leadership.
  • European equities are little changed through midday trading as UK’s June inflation exceeded expectations and May Eurozone output declined more than expected.
  • Asian equities ended their session mostly lower, as the Chinese Shanghai Composite finished down over 1% after reserve requirements for banks were surprisingly lowered.

Another look at CPI. June data for the Consumer Price Index (CPI) came in much hotter than expected yesterday, with the June headline CPI up 5.4% (highest since August 2008) and core CPI up 4.5% (highest since November 1991).

  • Here’s the catch. After looking closer at the data, much of the gains in June can be attributed to just four reopening categories: New cars, used cars, hotels and car rentals make up the majority of the spike.
  • For instance, used car prices were up a record 10.5% month-over-month (and 45% the past year), with new car prices up 2% (highest since 1981) as well. Just these two components made up 0.51% of the 0.88% month-over-month spike in June core CPI.
  • Adding in hotels and rental cars and these four categories now make up 0.7% of the 0.88% monthly jump in core inflation, meaning the rest of the inflation landscape was fairly tame.
  • Given the price of used cars is now 3% above pre-COVID levels, it is likely these prices begin to come back to trend soon.
  • We remain in the camp that higher inflation is likely transitory and this recent report does little to change our views.

Mr. Powell goes to Washington. Federal Reserve Chair Powell speaks before the House Financial Services committee today and will testify before the Senate Banking Committee tomorrow in his semiannual monetary policy meetings to Congress.

  • After yesterday’s strong CPI data, he will no doubt be grilled on his transitory inflation stance, but we expect him to remain firm here.
  • Remember the Fed’s latest Federal Open Market Committee (FOMC) meeting noted an improving economy, along with prevalent labor and supply chain issues. Expect questions around the need for more stimulus with an improving economy.
  • Other questions will likely center around when can we expect to see tapering begin of the current $120 billion a month of asset purchases.

Overall, we expect much of the next two days to be a non-event, but there is always the chance for some fireworks.

Technical update

Despite a strong bounce in the 10-year Treasury yield following yesterday’s CPI report, technology was the only sector to finish the day higher as the S&P 500 Index lost 0.4%.

Three Things to Watch This Earnings Season

 LPL Research anticipates a strong earnings season and outlines the three things investors should keep on their radars this quarter. Learn more in this week’s Weekly Market Commentary.

Midyear Outlook 2021 Is Here: What Does LPL Research Think Is On the Horizon?

In this week’s LPL Market Signals podcast, LPL Research’s Chief Market Strategist, Ryan Detrick and Equity Strategist, Jeff Buchbinder discuss how to navigate the risks and opportunities brought upon by the economy’s reopening for the rest of 2021 and beyond.



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