Daily Brief - Yields Soar, Inflation Woes

TLDR: As we step into a crucial week for the U.S. economy, the Treasury 10-year yield kicked it off by almost hitting levels unseen since November.

Approaching the 4.5% mark, a threshold keenly watched by investors as a potential harbinger of rates revisiting their 2023 peaks, the yield's momentary climb could signal turbulent times ahead.

This comes as traders recalibrate their expectations, moving away from the previously anticipated three quarter-point rate cuts from the Federal Reserve to a more conservative forecast of just two reductions within the year, the first expected by September.

Amid these market adjustments, all eyes are on the upcoming consumer price index report, anticipated by economists to reveal a mild relaxation of inflation pressures. However, the core measure, which strips out the volatile food and energy sectors, is expected to show a 3.7% increase year-over-year, still towering over the Fed's 2% target.

While the Federal Reserve has previously approached higher-than-expected inflation data with caution, a third consecutive month of such data could pivot their stance, signaling a more pronounced concern over inflation's persistence.

As we advance, the impending earnings season casts another layer of uncertainty, with forecasts pointing to modest profit growth for S&P 500 companies. Despite the market's lukewarm expectations, the potential for surprises remains, as seen in the previous quarter's performance, where actual earnings growth surpassed predictions.

Yet, with inflation resilience tempering rate cut urgencies, the burden on earnings to catalyze market advances grows heavier, especially against the backdrop of elevated market multiples and burgeoning bond yields.

Scenario Spotlight: Impact on the 10Y

History shows that in the past 14 episodes when the 10Y yield crossed above 4.5%, 10Y yields typically continued to rise over the following week.

Market Movers: If the 10Y rises

Here are the historically best and worst performing US sectors when 10Y yields rise 35bps in 1 month, and cross 4.5%:

The top 3 performing assets on a 1-month horizon:

1. S&P Banks Select Industry Index: 4.29%
2. S&P Semi Select Industry Index: 2.21%
3. S&P Regional Banks: 2.12%

The bottom 3 performing assets on a 1-month horizon:

1. S&P Autos & Components: -3.10%
2. S&P Homebuilders Select Industry Index: -2.37%
3. S&P Insurance Select Industry index: -2.07%

Earnings Spotlight: M&T Bank valuation

In the past 8 similar occasions when valuation indicators for M&T Bank were at a recent low, Toggle's analysis reveals the stock tends to see a median upward movement in the following 3 months.

The bank is scheduled to report earnings next Monday and analysts expect a year-over-year decline in earnings on lower revenues. If their numbers can top expectations, MTB could see rising returns.