Tide Going Out, Base Effects coming In
Macro Perspectives
We closed last week with the 10-year yield above 4%.Â
As we've observed over the past year, this has been the danger zone for global financial stability. Warren Buffett has said, "only when the tide goes out do you discover who's been swimming naked." The "tide" in this case is the easy money, low inflation era.
The trigger for the indecent exposure has tended to come from the level of market interest rates (not necessarily the Fed-determined interest rates). So, will more bad behavior be revealed, with the 10-year here?
Maybe.
That said, what could relieve some of the selling pressure in the Treasury market (and rise in yields)? Maybe a very eye-appealing inflation number this week - we get June CPI on Wednesday, and a "good" number is coming.
We've been talking for several months about the "base effect" in the inflation data, and the coming "cliff dive" for the headline inflation number by June. This June data is the month we should see the headline year-over-year number drop into the low-3s (maybe 2s).
Even if the monthly change in June inflation were to match the hottest we've seen over the past year (like 0.5%), the headline year-over-year CPI change would still fall to something like 3.15%.
It's the "base effect." As you can see in the chart below, the June inflation number will be measured against a number, twelve months ago, that stepped significantly higher.
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