US stocks are edging higher as investors anticipate a slightly less dovish Fed at next week’s FOMC policy decision. This week was all about the inflation report and given the reaction everyone saw in the bond market; the transitory thesis is winning. The 10-year Treasury yield is recovering some of this week’s loss and stabilizing around 1.45%, while the 10-year real yield improves to -0.9262%.
Inflation is being pushed higher on supply chain issues and pent-up consumer spending, all of which should start to ease around the end of summer. The next few trading sessions will likely see modest positioning ahead of the FOMC, with investors fixating over how discussions over tapering have begun. Fed’s Harker, Kaplan, Quarles, and Mester have all signaled now is the time to start thinking about tapering.
If next week’s FOMC decision yields a slightly less dovish Fed, a rebound in Treasury yield and the dollar could be in the cards.
The University of Michigan consumer sentiment unexpectedly rose in June on a stronger outlook. Inflation expectations declined for the year ahead and for the 5-10 year outlook. The reason for the decline in inflation expectations is because inflation is already here and impacting the consumer.
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