U.S. Economics – Inflation and U.S. Treasury Yields

Intro

The Consumer Price Index slowed to a four-year low of 2.3%, but the path forward remains difficult in terms of reaching and sustaining the FOMC’s 2.0% inflation target. On the y/y contribution front, Housing added 180 basis points, up from 160 basis points, and Motor Fuel subtracted 45 basis points, down from 36 basis points. While there is a lot that can be unpacked from this month’s CPI Day, we would highlight the following: A. the Housing contribution did not go down, B. the comparison set for Gasoline eases in May and will ease more meaningfully through September, C. U.S. Treasury yields have moved higher recently, likely reflecting rising inflation expectations, and D. the confluence of A through C likely points toward an FOMC that is incrementally less likely to cut the Fed Funds Rate in the near term.

Inflation and U.S. Treasury Yields

The Signals:

• • Consumer Price Index (Chart 1)
    • CPI for All Items slowed to 2.3% y/y from 2.4%, reaching a four-year low.
      • Housing, Other Goods & Services, Medical Care, and Food & Beverages continue to grow at a y/y pace north of 2% at 4.0%, 3.6%, 2.7%, and 2.7%, respectively.
      • Transport, Apparel, Education & Communication, and Recreation are below the 2% mark at -1.4%, -0.7%, 0.2%, and 1.6%, respectively.
  • Gasoline Prices (Chart 2)
    • The end-of-month average price for May thus far is $2.08, putting the y/y growth rate at -17%, up from -24% in April.
      • As the comparison set eases through September, we would expect to see the y/y growth rate accelerate on a rate of change basis, likely leading to a less negative contribution from Motor Fuel on the CPI front.
  • S. Treasury Yields (Chart 3)
    • Yields have moved higher across all maturities in May, but more so at the front end than the long end, resulting in a modestly flatter yield curve.
      • The 10-Year is likely picking up on heightened inflation expectations while the 2-Year is likely signaling a declining probability that the FOMC will cut the Fed Funds Rate in the near term.

The Takeaway:

• The economic indicators and market signals we track are mostly moving in a direction that would suggest inflation is likely to move higher, leading to a lower probability of FOMC rate cuts in the near term.

Visuals:

(Chart 1)

Source: Macrobond

(Chart 2)

Source: Macrobond

(Chart 3)

Source: Koyfin

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.