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Market Extra: Brace for economic data to be ‘extremely messy’ for awhile, and roughly 2% Treasury yields by year-end, say these market pros

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Job losses in the U.S. were extreme once the pandemic hit; so has been the economic comeback.

That’s why investors should buckle up for more shocks over the next few months of economic data, particularly after April’s consumer-price index rose at a surprisingly sharp 4.2% yearly pace, the fastest since 2008.

“We had really, really unusual inflation data,” said David Zervos, chief market strategist at Jefferies, on Wednesday during a virtual CLO and loan conference hosted by IMN. “And of course, this is an usual cycle.”

“We should expect extremities and confusion,” Zervos said, pointing to changing transportation needs and lifestyles during the pandemic, but also supply-chain bottlenecks as global trade picks up.

“I think the next three or four months are ugly.”

See: Inflation ‘surprises’ are ‘almost off the chart’ as data runs hotter than expected

After a selloff earlier in May, the main U.S. stock indexes were on pace for weekly gains Wednesday, with the Dow Jones Industrial Average
DJIA,
+0.03%

advancing 0.3% by midweek, the S&P 500 index
SPX,
+0.19%

up 1% and the Nasdaq Composite Index
COMP,
+0.59%

2% higher, in part as inflation concerns have ebbed.

So far, the reaction in debt markets to fears of runaway inflation has been muted, with the benchmark 10-year Treasury yield
TMUBMUSD10Y,
1.577%

near a three-week low of 1.572% on Wednesday, down only 6 basis points so far in May, according to Dow Jones Market Data.

“The data is going to be extremely messy, without a doubt,” said Michelle Meyer, head of U.S. economics at BofA Global Research, during the virtual talk.

One of the challenges in this recovery, she said, is getting “labor back in the door,” particularly since some people left jobs for personal reasons, including to protect their health or to take care of parents or children, when school classrooms shut.

“But if you increasingly see a bit higher inflation, wages moving up, and inflation expectations moving up, you also start to price that in, and that pushes up the long-end of the curve too,” she said.

“Now what’s fighting against that is the Fed,” she said. “I think the Fed is still very much committed to this late hiking cycle. It’s going to create a little bit of a cap in terms of how high rates can go.”

The rates team at BofA Global has forecast the 10-year yield to be around 2.15% by year’s end, while Zervos at Jefferies expects the rate to hold closer to 2%.

Since the 2008 global financial crisis, Zervos said the Fed has been on high alert to react when things go wrong, including potentially tightening easy-money policies or preventing overheating by raising interest rates.

“We’ve seen them react very aggressively, both in the 2008 and 2009 period, as well as in the COVID crisis,” Zervos said.

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