Treasury Yields Moving Up but No Need to Be a Hero Just Yet

As we continue to watch Fed Chair Powell’s second day of testimony, we are seeing the expected effect of Wednesday's hot January CPI report kick rate cut expectations well into 2H 2024.

Coming into the report, the market put that potential timing between the Fed’s June and July meetings, but now the CME FedWatch Tool has that looking more like October. The yield on the 10-year treasury is back above 4.6%, and we expect that will filter through to mortgage rates. We’re also seeing the chorus of folks calling for no rate cuts grow, including Bank of America BAC. Earlier on Wednesday, during an interview, CEO Brian Moynihan shared that the research team is not expecting any Fed rate cuts this year.

We’ll continue to follow the data, but as we noted in today’s Daily Rundown video, the January CPI figures were before the impact of recent Trump tariff announcements. Should Thursday's January Producer Price Index also come in hotter than expected and next week’s Flash February PMI show little improvement on the pricing front, it’s going to be difficult to envision much improvement in the February CPI data. In next week’s Flash PMI data, we’ll be mindful of comments about tariffs and any corresponding pull forward in activity.

While the market has recovered some of its earlier morning sell-off, the move up in treasury yields is still hitting our construction-facing names a bit harder than others. Part of this is a knee-jerk reaction but it’s our job to connect the dots, and in doing so we’d remind you of the large exposure United Rentals URI, Vulcan Materials VMC and Eaton ETN have to the non-residential construction market. That one is being fueled by infrastructure spending as well as data center buildouts and re-shoring activity.

While we took some flack when we exited the Portfolio’s position in Builders FirstSource BLDR, the data we are now seeing is what led us to make that decision. With hindsight bringing some added perspective, we were early in that decision. Our timing can always get better, and we’ll continue to work on that. Then again, we also missed the impact on the Portfolio of those shares dropping like a stone in the last few weeks, losing about 15% of their value.

As we’ve discussed before, volatility can bring opportunity, but with Thursday's January PPI report, Trump expected to announce reciprocal tariffs, and the potential for other countries to respond in kind, we’re going to bide our time in the very near term.

Reaffirming that decision, the S&P 500’s relative strength index (RSI) is just over 50, indicating it is far from being overbought and far from being oversold. While the RSI for the Nasdaq Composite is slightly lower, it’s in the same boat as the S&P 500.

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At the time of publication, TheStreet Pro Portfolio was long URI, VMC and ETN.