2-Year Treasury Yield Hits Multiyear High After PCE Beat

Swap rates and Treasury yields rise on hot PCE.  Treasury yields rose dramatically across a flattening curve today, the 2-year yield rising ~12bps to 4.81%, which is a multiyear high. Strong PCE and personal spending data paved the way for the move, as rates rose rapidly just after their release before sitting little changed until the close. Equities were hurt by the move higher in rates, the NASDAQ Composite declining 1.69% while the S&P and DOW lost just over 1.00%.

PCE shows no signs of slowdown. January PCE exceeded market estimates and last month’s figures. Headline PCE was driven by a 0.6% increase in prices for both goods and services. Food prices increased 0.4%, and energy prices increased 2.0%. Within goods, motor vehicles and parts along with recreational goods increased, partially offset by a decrease in gasoline prices. Within services, food services and accommodations prices rose, partially offset by a decrease in utilities and housing. Today’s Fed speakers reacted to the data with an inflationary outlook. Mester said “the inflation readings are still not where we need them to be,” and that the inflation forecast is “tilted to the upside.” A key driver of inflation is a persistently strong labor market, with Fed Governor Jefferson noting “the ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly.” Wall Street economists and academics see rates going higher than markets are currently pricing in; a paper published today, ahead of PCE, asserted that the Fed may need to hike up to 6.5% to combat inflation, and cast doubts on the potential for a soft economic landing. Going forward, markets will be closely watching Powell’s March 7th congressional testimony for clues on how the Fed plans to tackle runaway inflation in 2023.

Week ahead. Durable goods orders (Monday), wholesale and retail inventories (Tuesday), and PMI (Wednesday and Friday) highlight the data schedule. Central Bank members Philip Jefferson (voter), Christopher Waller (voter), Michelle Bowman (voter), Raphael Bostic (non-voter) and Thomas Barkin (non-voter) are set to make public comments, with Friday the busiest Fed day of the week.