While the CRB index is flat on the week, the implied inflation rate in the 10 yr TIPS has fallen 22 bps this week to 1.71%, the lowest since May 20th. It also coincides with the conventional 10 yr bond yield falling to the lowest since May 25th on the heels of the three solid bond auctions this week. Why is this? Inflation fears got ahead of itself (the y/o/y May PCE rose just .1% today)? The FOMC, while maintaining their current QE program, didn’t add to it and they also believe that inflation will remain subdued for some time due to ‘substantial resource slack’? Yesterday’s jobless claims data has traders worried again about the economy and the labor market and the deflationary implications, notwithstanding the upside surprise in durable goods orders on Wednesday? Or is it just a consolidation of the sharp move higher in inflation expectations over the past few months?
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