I keep going on incessantly about the similarities today to 2000 (Equity market, Fed, Dot com bubble etc.) and 2007 (Bond market-In particular 2-year yield and its forward guidance to the Fed etc.)
- History suggests that the numbers today will probably meet expectations.
- That would suggest a stable to modestly higher 10-year yield and a stable to slightly lower 2-year yield with some modest curve steepening.
- It could also be a day where the S&P just consolidates but unlikely that we see a fall of any magnitude and possibly a rise.
- At the margin I see the bond market overlay of 2007 (rather than the equity market overlay of 2000) as being the stronger of the 2 overlays so would be more inclined to anticipate a 2007 like reaction ie 2 year yields lower on the day and 10's stable.
- Either way, absent a topside beat the suggestion is that the weeks ahead should be positive for both Fixed Income and equities.
Overview
Nothing is ever the same and time will tell whether we get a deterioration similar to either of those 2 historical periods to maintain this path.
For now, the path is intact including in both years an early warning sign from unemployment (July number) that got more than validated with the August number.
To me despite the CPI prints today it is the employment numbers on 6 Sept the key. That does not make today unimportant-just less important. Absent big misses on either side the base effects are going to keep inflation pretty steady for most of the rest of the year.
Yesterday PPI printed virtually exactly as it did for the same number in 2007- missing on the downside and seeing prior numbers revised down. In 2000 it also printed exactly as expected but with the prior numbers revised slightly up.
In 2007 that saw yields drop as they did yesterday, but equities fell (They rose strongly yesterday) In fact after the sharp July correction lower the rally in equities only began on 16 August 2007 after the inflation, housing and initial claims numbers.
In 2000 yields rose on PPI day (3 bp's on 10-year yield and 8 bp's on 2's) - probably on the back of the upward revisions to PPI but equities rallied.
So, what about CPI today?
In 2007 CPI hit exactly on expectations both on the month and on a YOY basis (Both headline and Core)
In 2000 headline missed by .1 while Core met expectations
So, IN BOTH INSTANCES the expectation for Core was 0.2 and that is exactly what we got- which makes it the base case for today
So, what happened on yields and equities in 2000 and 2007 when CPI was released?
In 2007 the 10-year yield was unchanged on the day but turned lower thereafter. The 2-year yield fell 7 bp's and continued lower into September ahead of the 50 bp's cut by the Fed on 18th sept.
In 2007 the S&P fell marginally on the day, but the overall rally continued thereafter mid-October
In 2000 the 10-year yield rose 4 basis points on the day but turned lower thereafter. The 2-year yield also rose 2 bp's but then headed lower in the days after.
In 2000 the S&P fell marginally on the day, but the overall rally continued thereafter into 01 September.
So where does that leave us?
History suggests that the numbers today will probably meet expectations.
That would suggest a stable to slightly higher 10-year yield and a stable to slightly lower 2-year yield with some modest curve steepening.
It could also be a day where the S&P just consolidates but unlikely that we see a fall of any magnitude and possibly a rise.
IF we miss in either direction then we are likely to see a strong reaction as markets will look at the number for a guide to the Fed in September. On a downside miss I would expect a sharp move on yields led by the 2-year and curve steepening and a good rally in the S&P.
On a topside miss, given where yields and equities have gone in recent days, there is also likely to be an opposing reaction
We will know in just over an hour. At the margin I see the bond market overlay of 2007 as being the stronger of the 2 overlays so would be more inclined to anticipate a 2007 like reaction ie 2-year yields lower on the day and 10's stable.
Irrespective of today If we meet or miss expectations, I expect it to be positive in the weeks ahead for both fixed income and equities as it was in both 2000 and 2007.
Good luck