To The Moon

As we will be expecting the CPI figure tomorrow (13 Sep 2023), I have been monitoring and observing the movement of the treasury yield and the CPI.

But we should always remember that there are also some other key global economic indicators that we should look out for.

But I think we need to understand Consumer Price Index (CPI) significance and how treasury yields would behave when CPI comes in lower than anticipated.

Understanding the CPI and Its Significance

Before delving into the behavior of Treasury yields, it is important to understand the CPI's significance. CPI is a primary gauge of inflation in the economy.

When CPI rises, it indicates that prices for goods and services are increasing, eroding purchasing power. In response to high inflation, central banks may implement policies such as raising interest rates to control inflationary pressures.

Expectations vs. Reality

The financial markets pay close attention to CPI releases and often form expectations based on economic forecasts, historical data, and central bank guidance.

Note: not forgetting the other key economic indicators.

When the actual CPI data is lower than what was expected, it can lead to a series of reactions in the financial markets.

Yield Movements: Treasury yields, especially those on long-term bonds, tend to decrease when CPI comes in lower than expectations. This reaction occurs for several reasons.

First, lower inflation expectations can lead to lower long-term interest rates. Investors anticipate that the central bank will be less likely to raise interest rates to combat inflation in the near future, causing bond prices to rise and yields to fall.

Bond Prices Increase: When CPI disappoints, investors often flock to the safety of government bonds, pushing up their prices.

This increased demand for Treasuries, particularly longer-dated ones, puts downward pressure on their yields. Bond prices and yields have an inverse relationship, so as prices rise, yields fall.

Stock Market Impact: Lower-than-expected CPI can also have an impact on the stock market. Equity markets may respond positively to lower inflation, as it implies lower borrowing costs for companies and potentially higher consumer spending power.

However, the relationship between CPI and the stock market is complex and influenced by various factors.

Central Bank Response: The reaction to lower CPI is not solely based on the data itself. Market participants also consider how central banks may respond.

If lower inflation persists, central banks may adopt a more dovish stance, keeping interest rates lower for longer. This expectation can further suppress Treasury yields.

Currency Effects: Lower inflation can weaken a country's currency as it erodes the purchasing power of its currency. This can impact exchange rates, affecting trade balances and international investments.

Investor Considerations

For investors, understanding the behavior of Treasury yields when CPI is lower than expected is crucial for making informed decisions. Here are some considerations:

1. Diversification: Diversify your investment portfolio to balance the impact of yield fluctuations. Include a mix of assets like stocks, bonds, and alternative investments.

A way to diversify our investment portfolio is to include ETFs which are defensive in nature. $Vanguard Total Stock Market ETF(VTI)$

Here is how VTI has performed with reference to treasury yield

VTI seem to have moved pretty sideway without any impact from yield move. Here is some information we can look at, with a low expense ratio and a more than 1% dividend yield.

• Assets under management: $289.2 billion

• Dividend yield: 1.6%

• Expenses: 0.03%, or $3 annually for every $10,000 invested

1. Monitor Central Bank Policies: Keep a close eye on central bank statements and policies, as they play a pivotal role in shaping yield movements.

2. Economic Indicators: Pay attention to a range of economic indicators beyond just CPI, as they provide a more comprehensive view of the economic landscape.

Below is a chart that I have tabulate to show how each indicators stacked up :

• Consumer Price Index (CPI)

• Personal Consumption Expenditures (PCE)

• Producer Price Index (PPI)

• Federal Funds Rate

• Case-Shiller National Home Price Index

• US GDP growth rate

If we observed the chart below, we can see that National Home Price Index is actually falling which Fed Rate is going up, CPI, PPI and PCE seem to coming to a constant.

So how would we, as investors should be looking out for? From what I have gathered, I am expecting CPI to be below the expected figure. Hence, we would happen to the Treasury yield if that happen.

Why I am looking at the treasury yield because the market seem to have in tandem with it.

1. Long-Term Planning: Understand your investment goals and time horizon. While short-term market reactions to CPI data are common, long-term trends often provide a more stable picture.

Summary

Treasury yield behavior when CPI is lower than expected is a complex interplay of economic data, market sentiment, and central bank policies.

While lower-than-expected CPI can lead to lower yields on Treasuries, investors should approach these market dynamics with a well-thought-out investment strategy that aligns with their financial goals and risk tolerance.

Staying informed about economic indicators and central bank actions is key to making informed investment decisions in a constantly evolving financial landscape.

Appreciate if you could share your thoughts in the comment section whether you think it is important to understand the treasury yield behavior when CPI is lower than expectations.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.