Inflation? U Michigan Data Hits All Time Low

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U.S. Treasuries rallied in a big way this week.  Today, data for March point to very tame inflation.  Bond bulls argue the Federal Reserve could target for a even slower pace of interest rate hikes this year than it had forecast on Wednesday.

U.S. 30-year and 10-year Treasury yields, which benefit from low inflation since reduced purchasing power erodes their interest payouts, fell about two basis points after preliminary University of Michigan data showing low inflation in early March. – Reuters

“In December, half of FOMC participants started to factor in fiscal policy economic growth conditions into their 2017 and 2018 outlook.  With the Obamacare Repeal and Replacement legislation of life support, the stalled growth engines in Washington are piling up.  The execution bar has rarely been higher for D.C. politicians to come together and pass their much heralded agenda.  To us, the probability of caution coming out of the FOMC is surging.  We think they walk back their fiscal policy assumptions for 2017-18.  Bottom line: heading into the Fed meeting we are long duration – U.S. Treasury bulls through the TLT ETF and long gold miners through the GDX ETF. ”
The Bear Traps Report, Morning Note of March 15, 2017

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Looking at this week’s Fed meeting, changes to economic forecast were very minor from their December gathering.  This was was our view expressed to clients earlier this week.  Some on the Street were looking for an uptick in the Fed’s near term inflation projections.  The firm / specific statement that their inflation target is symmetric took the street by surprise.  Too many market participants were bought into inflation fears.  The Fed statement was modified to say that the committee looks for “sustained” return to 2% inflation.  In other words, no concern of an overshoot.

Inflation in Free Fall, a Bond’s Best Friend

umich 5-10 yr inflation expectationsThe very soft University of Michigan 5-10 year inflation expectations gave long term bonds a bid today. Number came in at 2.2% for March vs 2.5% from February.  It’s now at the lowest level since the recording began. While this survey data point does not have the biggest sample size, it does speak to longer term inflationary pressures being overstated.

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