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Bull Case For Treasuries Validated By Recent Data - An InfraCap Weekly Commentary

Bull Case For Treasuries Validated By Recent Data

September 5, 2023, New York, NY ~ We continue to forecast that 10-year treasury bonds are finding a bottom in the 4-4.25% area and are likely to rally significantly into year-end as Europe enters a recession and the US labor market and inflation indicator continue to cool.

Recent Economy Data for Europe

Recent Data for Europe

Based on recent data from Europe, we believe the Eurozone is likely to enter a recession this year. Here is why we believe this is the case:

  • The most recent Eurozone PMI came in at 47 vs. 48.6 the prior month with a reading below 50 indicating a contraction.

  • German retail sales for July came it at negative .8% and negative 2.4% year-over-year.

  • Meanwhile, inflation has not declined in Europe with the most recent year-over-year inflation coming in flat at 5.5%.

  • The ECB is likely to continue raising rates in the face of this level of inflation. Unlike the US Fed, the ECB has a single mandate to fight inflation even if it produces a deep recession.

  • It is also important to note that approximately 45% of mortgages are adjustable in the Eurozone, with less than 10% floating in the US, which will place tremendous pressure on Eurozone consumer spending as short-term rates rise.

Recent Data for the US

In the US, recent data has indicated a dramatic deceleration of the US job market. The most recent jobs report showed:

  • a sharp increase in the unemployment rate to 3.8% from 3.5%

  • a deceleration in the increase in wages from .3% to .2%.

  • The 3-month average number of private jobs came in at 140k vs. 212k the prior 3 months

  • two-thirds of the increase in private jobs over the last 3 months came from the health services sector, which is increasing on a secular basis due to the aging of the population vs. a cyclical increase in labor demand due to economic growth.

  • Finally, the most recent JOLTs reading came in at 8.8MM vs. a recent high of 12MM openings.

In addition, US inflation data continues to decelerate with year-over-year PPI at .7%, CPI-R (CPI Core with shelter inflation estimated using Case Shiller) at below 1% and year-over-year headline CPI at 3.3%. The most recent PCE-Core data showed a 3-month (average monthly) core reading of .24% vs. the prior 9-month average of .38%. This improvement came about despite the flawed estimate of shelter inflation incorporated in PCE Core. PCE Core with shelter inflation estimated using housing prices came in at only 2.4% year-over-year.

Given this recent data, we are projecting that the Fed will stay on hold for the remainder of this cycle and that Europe will head into a significant recession this year, resulting in a significant rally in global government bonds which could cause the US 10- year rate to drop into the 3-3.5% range.



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