US Treasuries are confronting overheating risks after the CPI and PPI releases over the past two days. Both prints beat consensus estimates (CPI actual: 3.8% YoY, consensus: 3.7%; PPI actual: 6.0%, consensus: 4.8%). More worryingly, there are signs that price pressures are broadening beyond energy-related components. This could well be the catalyst that would put Fed officials on alert even as market participants await guidance from new Fed Chair Kevin Warsh (who has just been confirmed).
The US economy has been remarkably resilient. Between two consecutive positive NFP prints and the Atlanta Fed GDP Nowcast running at 3.7%, signs are tilting firmly towards overheating. This probably explains why US yields across the curve have been drifting higher (and a pay bias seems to still be intact). We reckon that the Trump-Xi meeting (scheduled for today and tomorrow) also offers upside risks to yields. To be sure, there may be a grand bargain struck over Iran or on tariffs, which could dampen immediate term price pressures, but this would also correspondingly reduce recession risks down the line. Moreover, we note that there is a large delegation of US firm CEOs that are also in China. Another buy US or invest in the US deal is also plausible, which could further stoke growth / inflation expectations.
As tempting as current yield levels are, we are not convinced that the rise is done. 10Y US yields could head into the 4.5-5.0% range if the US overheats. 2Y yields could also breach 4% if Fed officials start to sound worried about inflation and the odds of tightening start to rise. Lastly, we would also watch the interplay between rising rates and sentiment, noting that aggressive Fed hikes were the main reason stock markets performed badly in 2022.
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