Have Treasury Yields Risen Too Much?

The most striking market action last week was not the new record highs set by the stock market but the sharp rise in intermediate- to long-term Treasury yields.  They rose 12 to 22 BPs, with the 10-year ending the week just shy of 2.00% at 1.94%.  An increase in these yields was expected, for the the reasons I gave in last week's blog, but the extent risks being overdone for now.  There is still no confirmation of the October Employment Report that economic growth is speeding up,   Indeed, the Atlanta Fed model's early estimate of 1.0% Q419 Real GDP Growth is very low.  And, inflation still seems to be subdued, despite the ominous sign from Compensation/Hour -- the broadest measure of labor costs -- which were up 4.5% (y/y) in Q319, well above the near-3.0% pace seen in other labor cost measures (e.g., Average Hourly Earnings and Employment Cost Index). 

This week's US economic data will probably not change the macro picture by much.  The consensus estimate of +0.4% m/m for October Ex Auto Retail Sales probably has to be combined with an upward revision to September's -0.1% to notably boost the Atlanta Fed model's estimate of Q419 Real GDP Growth.  The latter assumes consumption will slow to 2.1% from  2.9% in Q319.  Some upward revision to the model's 1.0% estimate is likely, since it is too low relative to Total Hours Worked in the October Employment Report.  But, it will probably take more than an upward revision in consumption to pull the model estimate up to around 2.0%.  A pace below that would argue against the run-up in Treasury yields seen last week.

The consensus estimate of -0.4% m/m for October Industrial Production risks being too high, given the larger drop in Total Hours Worked in Manufacturing that month (see last week's blog).  But, IP should rebound in November, now that the GM strike is over.   So, a weak print for October should be dismissed.

Meanwhile, even if Q419 Real GDP forecasts are raised from very low early figures, a near-trend 0.2% m/m in the October Core CPI, as consensus expects, would keep the y/y steady at 2.4% and signal no significant inflation pressures.  There are some downside risks to the consensus estimate, to boot.  For example, apparel prices could fall again, or at least stay soft, as a result of bi-monthly sampling.  And, airfares could fall, following the decline in oil prices.