The FOMC has flattened the Treasury yield curve this week. Whether that was the Fed’s intention is not clear. Officials may have preferred a bigger reaction at the long end of the curve. The risks of a taper tantrum persist.
If Treasury yields were to vaguely normalise, the stock market would look very overbought. The reverse yield gap (with 10-year Treasuries) would move comfortably into positive territory.
A modest rise in Treasury yields might not be a problem: in a nod to bulls, the Republicans and moderate Democrats have so far proved a partial brake on the Biden administration’s spending impulses.
That said, inflation risks have caused the Fed to revise up their forecast for the consumption deflator. This week’s PPI report contained evidence of a significant follow through, from rising costs to final prices.
Strong demand is pushing up prices across IT-related products. This week’s industrial production report underlined the strong upward trend in IT-related spending. The May report included significant upward adjustments to the data, as part of the annual revisions: the y/y change for selected high-technology was pushed up from 11.7% in April to 16.5%: May saw a further acceleration to 18.4%.
