- After weeks of drift and doubt, Wall Street was looking for a decisive signal on price growth to help put the reflation trade back on track. Instead, it got another mixed message.
Prices paid by customers in May rose at the fastest rate since 2008, but the details of data released Thursday supported the Federal Reserve's view that the jump will prove transitory.
As investors digested the numbers, an earlier increase in Treasury yields lasted little more than an hour, and by lunch they were extending initial declines. Companies led the technical advance, with the Nasdaq 100 s outperforming as more sensitive sectors lagged economically.
In the end, a print like this is not enough to get the Fed to flinch, which is - big picture - what matters, said Ros Mayfield, an investment strategy analyst at Robert W. Baird Co. If economic numbers are strong and prices are rising because of consumer demand, that's good for stocks.
The data offered little reason to believe on either side of the inflation debate, but it was the reflationistas who need the most a boost.
Now all the betting on brewing price pressures look set to remain on the back foot. In the lead-up to the data, market-derived expectations of price growth were declining with gauges of two -, five - and 10 year breakevens all going higher after peaking mid-May.
'Markets are in a Goldilocks scenario: higher inflation and low growth at trend, said Pascal Blanque, Chief Investment Officer at Amundi Asset Management, who recommends short duration and long value-stock trades. 'But we will likely end with lower structural inflation and higher growth in the future instead.
There are still plenty of good reflation bets out there. Investors continue to add cash to inflation-protected bond ETFs, with the $29 billion TIPS ETF luring money six weeks in a row, even as its price fluctuates.
Dennis DeBusschere and his team at Evercore ISI see the recent decline of market-generated inflation expectations as a tail wind to economic growth. As commodity pricing is cleared, labor markets improve and China pushes up yields as expected, the odds of a'significant move higher in yields will rise again, according to strategists.
With the slightly declined long term demand outlook, a slight decline in inflation expectations gives the Fed room to keep policy longer,” they wrote this week in a note.
The inflation data originally sent the yield on 10-year debt to a modest three basis points higher, but by 2: 45 p.m. in New York it was down one basis point at 1.462%. It had dropped 26 basis points since March 11.
In stocks, flows to ETFs tracking small and value stocks have slowed since their March peak. The $45 billion Financial Select Sector SPDR Fund, whose assets tend to benefit from the rate regime, saw the biggest exit on Wednesday since April. Despite three days of solid inflows, the $70 billion Russell 2000 ETF shows great outflow for June.
'The US debt have held up so well since the 10 year peaked on 31 March, and sectors like finance have clearly been telling a different story than bonds, said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. Given this deviation, it won't surprise me to see the reflation trade take a bit of a breather here.
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