Consumers Tell Fed – Conditions Are Tightening

Rates inch higher to start inflation week. Swap rates and UST yields moved slightly higher today ahead of CPI on Wednesday and PPI on Thursday. A slight increase in 1-year inflation expectations contributed to the move, though the 2-year yield closed unchanged at 4.99% and the 10-year jumped 3bps higher to 4.29%. Elsewhere, the S&P, DJIA, and NASDAQ rallied today, the latter rising 1.14%.

Inflation expectations stable, but perception of credit conditions deteriorates. The NY Fed released their August Survey of Consumer Expectations today. Consumers reported 1-year inflation expectations slightly higher than last month, at ~3.6% vs. ~3.5% prior, while both 2- and 3-year expectations were only slightly changed. More notably, “perceptions about current credit conditions and expectations about future conditions both deteriorated,” the New York Fed said in a statement. Consumers see a higher unemployment rate as more likely in the near term and are having a harder time accessing credit. The share of households expecting their household finances to be worse-off within one year also climbed.

The yen, yuan, and dollar. The long-struggling yen and yuan appreciated against the dollar today after Japanese and Chinese authorities signaled preparedness to strengthen their respective currency. BOJ Governor Ueda said that Japan could shift away from negative interest rates if the BOJ becomes confident in a sustainable rise in prices and wages. In China, the PBOC stressed that they will take action whenever needed, and they are confident in keeping the yuan stable. Despite the potential for intervention, the differences in monetary policy between the U.S., China, and Japan should keep the dollar elevated.