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Inflation Spooks Bonds, While Stocks Say “Meh”


Chief Strategist at Interactive Brokers

This morning we received our second consecutive higher inflation reading from the Bureau of Labor Statistics (BLS).  The Consumer Price Index (CPI) rose by more than expected, and this came one day after the Producer Price Index (PPI) rose as well.  The following table tells the story:

We see that the PPI numbers, though high, were largely in line with expectations, while the CPI numbers exceeded already high estimates.  Fixed income markets reacted largely as one might have predicted, with a bit of a relief rally yesterday that was more than reversed today.  The 10-year Treasury yield fell from 1.491% on Monday to 1.438% yesterday, only to bounce to 1.52% as I write.  The reaction in 2-year yields was even more extreme, going from 0.445% to 0.423% to 0.505% in that span. 

We discussed the wild gyrations in short-term rates about a week and a half ago (Bonds Tremble, Stocks Yawn – Traders’ Insight (, and I’ve been paying keen attention in the ensuing days.  When I studied a chart of 2-year yields this morning, I noticed a striking resemblance to another chart that I had recently studied.  Please examine the chart below, where I have removed the Y-axes (which are different) and any identification of the securities.   Can you guess the two well-known securities pictured?

6-month Chart, Two Unnamed Securities, with no Y-axes

6-month Chart, Two Unnamed Securities, with no Y-axes

Source: Bloomberg

These two items have shown very similar movements, but they are vastly different in character.  Consider the rather coincidental relationship once more before I reveal the full data in the chart:

6 Month Chart, 2-Year Treasury Yields (blue/white bars), vs Tesla (magenta line)

6 Month Chart, 2-Year Treasury Yields (blue/white bars), vs Tesla (magenta line)

Source: Bloomberg

Yes, the wild gyrations in 2-year yields over the past 6 months are quite similar to that of Tesla (TSLA)!  Believe me, I was shocked when I juxtaposed them on a graph for the first time.   To be fair, the actual price changes in 2-year notes are FAR more muted than those of TSLA.  Even as the yield rose by about 8 basis points today, the actual price of the on-the-run 2 year note fell by about 6/32 of a point.  That is the polar opposite of TSLA, where prices fell more than 10% yesterday and are rising 4% today. 

Stocks in general, however, showed little fear after today’s inflation report.  As I write this, the S&P 500 (SPX) is down about 0.1% and NDX about 0.4%.  It is a relative yawn compared to the bond market.  The recent upward momentum in stocks is not carrying through today, but it is providing some ballast in the face of the type of economic results that might otherwise be spooking stock traders.  It remains to be seen whether the collective “meh” reaction by equity investors to the lofty inflation numbers is a sign of underlying strength or collective denial.

Disclosure: Interactive Brokers

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