Yield Curve Flattens Ahead of Inflation Data

Long-term rates fall across a flattening curve ahead of CPI print, bank earnings. Long-term Treasury yields and swap rates fell sharply to kick off the holiday-shortened week, the 10-year Treasury yield dropping 3.5 bps to close below 1.60% at 1.58%. The short-end of the curve rose 2 basis points- leading the spread between 10-year and 2-year rates (a measure of yield curve steepness) to narrow by over 5 bps. Today’s volatile price action could be set to continue tomorrow as markets get their latest look at inflation via the September’s CPI figures, and as earnings season gets underway with several large banks reporting third quarter results.

Small business optimism dropped in September. The NFIB Small Business Optimism Index decreased to 99.1, down 1 point from the prior month. The decrease in sentiment was primarily due to hiring challenges, supply chain disruptions, and inflation outlook. Small business owners reporting job openings increased to 51%, a fresh record, while owners expecting business conditions to improve over the next six months decreased 5 points to a net negative 33%.

International Monetary Fund (IMF) warns that inflation risks are “skewed to the upside” as U.S. consumer inflation expectations hit a new high. In its World Economic Outlook, the IMF commented that central banks will need to be “very, very vigilant” in the coming months if secondary inflationary shocks do not subside. The New York Fed also released a survey today that showed U.S. consumers expect inflation to be 5.3% over the next year, a fresh record high. Further, Atlanta Fed President Bostic commented today that “transitory is a dirty word,” as he no longer sees it as appropriate to refer to price increases as transitory. Tomorrow, investors will get the latest update on the inflation debate with the release of the consumer price index at 8:30 EST.