Fatalities from Covid-19 remain low in relation to the peak (2,749, April 21st) and low given the jump in infections recorded last month. The Treasury market is focussed on the better labour market data and the pop in CPI numbers. The ten-year Treasury yield has risen to 0.71% with both break-even inflation rates and indexed-linked yields up last week (by four and ten basis points to 1.65% and -0.94% respectively).
A new all-time high for the S&P 500 could put further upward pressure on Treasury yields. This is the sweet spot for US monetary policy. The Fed can ‘lean into’ pressure for higher yields, reminding investors that it could introduce yield curve control. YCC is not just a crisis tool: it works particularly well in the early stages of an economic recovery, holding down rate expectations. YCC becomes particularly powerful when the fiscal throttle remains wide open.
To be quite clear, the threat of a ‘third’ wave over the winter has not diminished. Scientists worry that the US administration is unprepared. The US election will be a distraction ahead of the inevitable, seasonal pick-up in infections. Vaccines may be ready in time but inoculating wide swathes of the population will not be easy.
That said, there have been a number of promising developments: for example, synthetic nanobodies could be “robust enough for aerosol-based applications — opening the door for a widely-deployable agent to prevent COVID-19 illness”.
Summary
• Better jobless claims for second week running
• Investors rotate into cyclicals again
• Rebound in CPI supports can be countered by YCC
