Treasuries Commentary - 1/23/2023

With PPI at 6.3%, markets see a light at the end of the inflation tunnel and therefore an end to restrictive monetary policy. While it is premature to declare such victory, the relative stickiness in food does look more encouraging in the context of fertilizer prices at -8% Y/Y. A substantial increase in construction of single- and multi-family homes should also alleviate some of the price pressures in shelter, leading to a further deceleration of headline inflation. Encouraging from a corporate standpoint, J.B. Hunt Transportation noted in its Q4 2022 earnings call that they “see the shift occurring now where customers are putting more value on cost or how to save the money and on service quality as capacity is less difficult to source.” When additional capacity hits more cost-conscious consumers, prices should go down or at least stay stable. Turning to recession concerns, growth trends are concerning in manufacturing but remain healthy overall. While the Empire State Manufacturing Survey indicated a decline from -11.2 in Dec. to -32.9 in Jan., Atlanta GDP Now remains solidly above 3%, now at 3.5%. Combined with less stress in credit (Moody’s Aaa at 4.36; Baa at 5.46) and initial claims at +190k, the soft-landing camp is currently on a victory lap. If China stays the course on reopening coupled with its demographic challenges, the net-impact may also be deflationary despite the commodities demand impact.