After yesterday’s strong performance it would have been nice to at least hold those gains. If that had happened, the bigger picture would look decidedly better in terms of chart patterns. As it stands, the big picture still doesn’t look “bad,” but today’s weakness leaves the probability of negative outcomes on a relatively level playing field with positive outcomes. In other words, things were looking good for bonds until this week, and now they look more neutral.
Reinforcing that neutrality is the relative lack of week-over-week movement. 10yr yields closed out just over 1.76 today versus just under 1.75 last week. If it helps put the day’s events in context, yields were at 1.75 just before this morning’s data.
Despite most of the weakness being in place from the overnight session and early domestic trading, data didn’t help. GDP came in stronger than expected, and made for a modest extension of selling pressure in bond markets. Most of the day’s remaining trading took place within the confines of the yield curve as investors more aggressively sold shorter-duration bonds. More simply put, 2yr notes got hammered while 10’s and 30’s held their ground. The 2-3 people actually trading Fed Funds Futures would probably tell you that’s a direct expression of a very modest increase in Fed rate hike potential in March.
A quick look at the yield curve minute by minute today tells us this was ALL about the 10am Income/Outlay data, which showed a rather incredible jump in inflation. Core PCE inflation (long touted as the Fed’s preferred inflation metric) leapt a head-scratching 0.3 percent from 1.4 to 1.7.