You Won’t Believe What the Bond Market Just Did

Jeff Snider · Atlas Financial

The rare curve shape signals Fed policy risk, not stronger growth or lasting inflation; reinversion is plausible.

The two-year Treasury yield rose from 4.46% (last Thursday's low) to 4.75%, while the ten-year moved from 4.84% to 4.99%, so the two-year to ten-year spread flattened to 24 basis points. The curve is steep at the front and flat farther out, a rare shape. Snider reads this as the market pricing more Fed hikes in the short run without pricing the stronger growth, income or lasting inflation that would justify them. If the payrolls had signalled genuine acceleration, the ten-year should have risen far more than the two-year; if inflation were entrenching, long-term yields and breakevens would have steepened the curve. Swap spreads also resemble the cautionary environment of late 2023 rather than an inflationary expansion. He calls this a market pricing a policy mistake and says reinversion is again plausible. He also argues that this week's sell-off is largely a retracement of a substantial early-October rally, and that yields were bound to bounce in the short run.

“The market is pricing higher Federal Reserve rates over the short run without pricing the stronger growth income or lasting inflation that would justify them. That's Fed risk, not economic strength nor inflation potential.”at 0:37

Jeff Snider · Atlas Financial

October CPI shows no sustained inflation breakout; TIPS breakevens and swaps show no market-implied acceleration.

Snider argues that if the CPI report confirmed broadening and accelerating inflation, it would already show in the market, in TIPS breakevens, inflation swaps and the yield curve. None of these shows it. Breakeven inflation rates have barely responded through the energy shock, and the latest CPI produced no sustained breakout in market pricing. Nominal yields reflect expected inflation, so if investors expected persistently higher inflation they would demand far more inflation compensation for long bonds and steepen the curve. Instead the volatility is driven by the front end. On the CPI itself, core rose 0.3%, which was more than economists hoped, but he says it means inflation failed to decelerate as fast as forecast, not that a new accelerating trend has been established. He also points to the details: groceries, housing, electricity and motor-vehicle insurance drove the increases, which he reads as household pressure from unavoidable costs rather than surplus income chasing goods.

“TIPS remain remarkably calm. Breakeven inflation rates haven't surged. They barely responded even during the energy shock... And the latest CPI report hasn't produced a sustained inflation breakout in market pricing.”at 3:47

Jeff Snider · Atlas Financial

Fed hikes on one CPI print risk a Trichet-style policy error, driven by credibility worries rather than evidence.

Governor Waller had already committed to a December hike and said a half-point move could be considered if core CPI rose 0.3% or more; core rose exactly 0.3%. Dallas Fed President Lori Logan backed at least two more quarter-point hikes, possibly sooner. Snider compares this to Jean-Claude Trichet's 2008 ECB hike, which responded to an energy-driven rise in headline inflation while the financial and economic system was deteriorating. He argues the error was treating a supply-driven price shock as self-sustaining demand inflation, and that Waller's credibility emphasis creates the same risk. He says officials are acting against what they fear, not against what income, credit, employment quality and market pricing show, and that the Fed is confirming its own biases by weighting strong payrolls and hot CPI while ignoring weak months. He calls this insurance that becomes very expensive when bought by weakening households, and says the October FOMC statement itself admitted officials lacked the information to set their stance.

“If the Fed believes it must raise rates simply because core CPI failed to decelerate enough, policy becomes detached from the mechanism required to sustain inflation.”at 8:22

Jeff Snider · Atlas Financial

Consumer prices are outpacing wages, so households are losing purchasing power rather than overheating demand.

Year-to-date figures show consumer prices up 3.3% while wages rose only 2.3%, so inflation is outpacing pay. Snider reads this as a reduction in real purchasing power, not an inflationary wage-price spiral. Households are paying more for groceries, utilities, housing and insurance, which leaves less income for discretionary purchases. Consumers respond by trading down, cutting volumes and abandoning purchases, so higher price levels become restrictive. Labor's share of income recently fell to 52.8%, the lowest in records back to 1947. Nominal income growth is nowhere near the levels needed to sustain a spiral. Consumers' unemployment fears have risen to their highest since April 2020, which he says is how households respond when jobs are harder to find and wages are inadequate, not an economy producing excess income.

“Consumer prices increased 3.3% while wages rose only 2.3%. Inflation is outpacing pay.”at 12:45

Jeff Snider · Atlas Financial

October's 165,000 payroll gain looks like temporary front-loading that will be paid back, not a recovery.

Payrolls rose 165,000 in October, more than three times the prior year's average monthly gain of about 48,000, and revisions added 84,000 jobs. Snider counters that the gain was concentrated in manufacturing, transportation and professional services, where production, inventories and deliveries were pulled forward in response to the energy shock. He cites the same pattern earlier in the cycle: shock, front-loaded activity, the appearance of resilience, revisions, then payback. Beneath the headline, part-time employment for economic reasons jumped 339,000 to 4.8 million, long-term unemployment stayed elevated at 2 million, average weekly hours were flat at 34.4, and wage growth was only 3.1%. Employers added workers without extending hours or showing confidence in lasting expansion. Given a growing population and labor force, he says the prior year's small gains were effectively contractionary, so one or two strong months do not erase that accumulated shortfall.

“The risk is that October payrolls represent the high of another artificial mini cycle, not the beginning of recovery.”at 15:49