American markets closed with gains but, US equity futures today are on a slippery slope, largely due to the pressure from rising Treasury yields. The yield on 10-year securities broke through the local high of 1.55%, signaling the resumption of the rally after a brief respite:
For a short period following the Fed September meeting, Treasury yields have been rising thanks to the rise of real interest rate (as seen from the recovery of TIPS yield). The inflation premium apparently again has become the main component cause of the rally in yields. Yesterday, the 5-year average expected inflation premium jumped 6 bps, from 2.53 to 2.59%. Since the start of 2021, intraday increments of the bonds’ inflation premium were stronger in only 5% of cases:
Inflation expectations keep rising in the wake of rising energy prices, which set the stage for higher costs for firms, which may eventually be forced to transfer this pressure onto consumers.
After a short break, the dollar went on the offensive again. Higher US rates stimulate the inflow of foreign investors into fixed income instruments. Before the Fed meeting in November, in which the policymakers are expected to clarify the prospects for tightening next year; the current policy of the Central Bank is likely to be slightly stimulating. So, this means that bonds in the US are depreciating, sometimes taking short pauses. Naturally, due to the trend in bonds, there is a high risk that risk assets will experience difficulties with growth. As alternative investment instruments, they offer ever higher returns.
Yesterday's data showed that the US economy is doing well, the service sector PMI from ISM more than met expectations, showing an increase from 61.7 to 61.9 points (59.9 points forecast). Creation of new firms have slowed down, labor costs have risen, and labor shortages persist. Costs remained generally elevated, indicating the risk of higher consumer prices in the coming months, i.e. inflation. The corresponding sub-index rose from 75.4 to 77.5 points and is at its highest since 2008.
The biggest event of economic calendar today is ADP report which is the first part of US labor data in the NFP week. A gain of 428K is expected, but the number could easily beat forecasts given positive preliminary employment data and retreat of Covid in the US in early September, which, as recent history shows, creates the risk of underestimating the positive dynamics of hiring. In case of positive news, the dollar index will likely be poised to target resistance at the previous local high (level 94.50).