So far, bond markets seem to be responding to the higher jobless claims data. That is potentially a mistake for two reasons:

• Could be a lot of noise from Hurricane Helene.
• Algos haven’t yet been forced to adjust to the reality that the Fed, while heavily influenced by jobs data, is also going to have to watch inflation risks – see War, Inflation, and the Neutral Rate.

CPI, while not alarming by any stretch of the imagination, is not completely comforting either. But while that data is in the past, what is coming up on the inflation front?

Two potential sources of inflation:

• Chinese Stimulus Simplified. Markets got ahead of themselves with China’s market closed for a week, but they have since started to tick higher. Look for “iterative” stimulus. If whatever stimulus is launched this round isn’t enough to achieve their goals (see the report link at the start of this bullet point), then they will provide more stimulus.
• Hurricane rebuilding. Both Helene and Milton caused major damage. That will potentially show up in higher unemployment claims (and maybe even weaker jobs) for a period of time, but all reasonably well telegraphed. Then the insurance checks will start coming and be added to spending (from out of savings) to rebuild. My assumption is that many of the areas hit with damage are owned by relatively wealthy people. That those people have good insurance policies and savings that they can dip into during the interim. They are not going to want to live with damage to their property. That will get fixed. The state will mobilize. In an election year, it seems likely that politicians will rush to be seen doing something/anything to alleviate the problem. I’m assuming that there will also be cars that need to be replaced. More inflation pressures seem to be the likely outcome as the areas hit by the hurricanes start to rebuild.

Bottom Line

The 10-year part of the yield curve is near resistance at 4.07% (been a rapid move from 3.73% at the start of the month). We will get through the 30-year auction today, which might be another reason for the long end to bounce. So tough levels on yields to remain fully bearish, but I think pressure from the inflation front will add to bond woes in the coming weeks.

The front end is being too quick to price in more dovishness by the Fed, but I don’t think I disagree by much over the next 4 meetings (88 bps priced in and I’m more like 50 over that timespan).

Equities have done a good job ignoring higher yields, but I find it difficult to believe that will continue, especially as very little has been done to address the risk of escalation in the Middle East.

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