Data for Breakfast, Rally for Dinner

Economic growth coupled with declining inflation is becoming a fan-favorite in the US.

Inflation and spending headlined the day, driving Treasury yields lower and equities higher. The 10-year was down ~6bps to ~3.96% and the 2-year was down ~5bps to ~4.89%. Equities ended higher for a third straight week, with the DOW up 0.5% and the S&P 500 up ~1%. Core Personal Consumption Expenditures (Core PCE) hit a 2-year low, rising 4.1% YoY and 0.2% MoM. Higher energy and services costs were offset by lower goods and food prices. Personal spending was also far above estimates as consumers dipped into savings to buy goods (+0.8%) and services (+0.4%). Traders have locked in strong bets (80% odds now) that the Fed will hold rates steady at the next policy meeting. Next Friday’s closely watched labor data will further test the thesis’ resilience.

The Bank of Japan (BOJ) announced a shift in its monetary policy that could have wide-ranging effects on global yields.

Traditionally, the BOJ has employed measures to keep longer-term yields low for Japanese government debt, but signaled today that it would accept higher yields on some longer-term government bonds. Yields on US Treasuries and other sovereign debt could change as Japanese investors, who currently hold over $1 trillion in US Treasuries, potentially reposition funds from other government securities into Japanese debt.

Week Ahead: The first Friday of the month means there will be plenty of labor data to sort through, headlining a packed week. The blackout is over, so be on the lookout for ever-more Fedspeak.