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Breakeven Inflation Rates Fall from Early 2022 Highs

Reflation trade takes a breather. After a torrid start to the year, swap rates and Treasury yields have strung together a few milder sessions, giving the market a well-deserved break. Market-implied inflation rates fell substantially on the day, 5-year breakevens declining below 2.75% after cresting 3% earlier this year. The big news today was Peloton’s temporary production halt which pulled everyone’s favorite home fitness company down by 24% – far too early to tell how this will impact the Fed’s impending rate hike.

Omicron comes for U.S. jobs. U.S. initial jobless claims unexpectedly climbed last week to 286,000 with estimates expecting claims of 225,000. The next few weeks could be volatile in the U.S. labor market as cities across the U.S. battle the highly transmissible variant. Although claims have seen a steady rise over the past few weeks they are still at pre-pandemic lows and should not impede the Fed’s current path of tightening.

Philly > New York. This isn’t a debate about who has the better sports fans (who pelted Santa with snowballs?) or the better food (it’s not called a New York cheesesteak), but for January it seemed to be a clear winner between business outlooks. Earlier in the week, the New York Fed showed its first contraction in business conditions since the onset of the pandemic, while the Philly Fed printed better than expected results this morning. The Philly Fed’s Business Outlook index increased to 23.2 in January beating expectations of 19. The index calculates the percentage of respondents indicating an increase minus the percentage indicating a decrease. As the New York Fed survey indicated, the Philly Fed price index remains elevated as producers continue to face pricing pressure. This is the 20th consecutive month showing positive growth for the index.

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