Yield Curve Nears Inversion, Risk Assets Rally as Tariffs are Delayed

 

Consumer Price Index shows unexpected acceleration in July, signaling inflation may be strengthening as the Fed considers additional rate cuts. Core CPI rose 0.3% month over month, 2.2% on an annualized basis. Headline CPI rose at a 1.8% annualized rate, also beating estimates. Slowing inflation has been the Fed’s primary justification for cutting rates amid all-time lows in unemployment, and should other inflation metrics show acceleration it will be increasingly difficult for the FOMC to cut rates in September. Nonetheless, Fed funds futures still price in a 100% likelihood of a rate cut at the next FOMC meeting.

 

 

Treasurys fall across the curve after trade détente, spread between 2 year and 10 year yields falls to narrowest level since 2007. Treasury yields and swap rates rose 7-10 basis points across the curve, short term rates rising significantly to push the 2’-10’s spread near inversion. The spread between 2 year and 10 year Treasury yields fell to 3 basis points, the narrowest level since 2007. The MOVE Index, a measure of interest rate volatility, sits near the year-to-date highs at 77.7.

 

 

US trade officials grant delay on new tariffs on certain consumer goods, leading equities higher. The delay of tariffs on electronics, toys and apparel helped stocks like Apple, Best Buy and Target surge higher- the S&P 500 rising 1.48% on the day. The encouraging step towards a trade resolution brought relief to markets, but a full trade agreement still appears a ways off. The VIX or “Fear Index” fell 3.5 points to 17.5, a relatively subdued level considering the market volatility as of late.