CPI Numbers Aid the Case for a Fed Pause in June

    • Markets liked the somewhat friendly read on inflation for April that came in at or below expectations, and some of the problem areas (core services, owner’s equivalent rent, and food to name a few) repeated the improvement that was first noted in March and that is lending a positive tone to both Treasuries and equities. While there will be another inflation report before the June FOMC meeting, today’s numbers certainly give the Fed room to pause in June should May’s numbers not surprise to the upside.  Currently, the 10yr is yielding 3.46%, up 15/32nds in price while the 2yr is yielding 3.95%, up 4/32nds in price.


    • As mentioned above, April CPI came in on or below expectations and some of the improvements noted in March repeated in April which lends credence that positive trends are developing vs. one-off declines. Overall CPI rose 0.4% MoM (0.368% unrounded) matching expectations but higher than the 0.1% in March which was driven by lower energy prices. The YoY rate ticked down to 4.9% beating the 5.0% expectation which was the pace in March. The YoY pace is the lowest in nearly two years.
    • The core rate at 0.4% MoM (0.409% unrounded) matched expectations and the rate in March. The YoY rate ticked down to 5.5%, as expected, from 5.6% in March. Importantly, the so-called super core services rate (core services ex-housing) slowed to a 0.11% MoM rate vs. 0.40% in March. The YoY rate slowed to 5.11%, the lowest since the middle of last year (see chart below). In addition, the Owners Equivalent Rent component was unchanged at 0.5% indicating the easing trend that we have been anticipating seems to be finally here, but it will be a gradual process. OER averaged 8.1% over the last year, so the 0.5% MoM pace is a definite improvement. Importantly, we should expect more declines in the months ahead for this lagging indicator. Another interesting finding was the Food at Home category followed a March decline of -0.3% with a decline of -0.2% in April. The decline in March was driven by a 10% drop in egg prices but April’s decline was more broad-based in nature with dairy, cereals, and bakery products joining in the decline which is more good news.


    • All-in-all, this is a positive read on inflation, and while mostly as expected the market was obviously fearing a hotter print. The drop in the Super Core reading is aiding today’s rally as well. The inflation numbers likely keep the Fed on the sidelines at the June meeting. The one caveat there is that the May CPI report will be released the day before the June rate decision so that will be the last hurdle to clear before a decision is made. Fed funds futures pricing has odds at 14% that the Fed hikes in June.


    • The next bit of news the market will be looking for is a resolution of the debt ceiling drama. The White House meeting yesterday didn’t produce anything substantive other than to plan another meeting on Friday, which realistically was all that could be expected with several weeks remaining before June when cash will become dear for the Treasury without a debt ceiling increase.

Core Services Ex-Housing (MoM and YoY)

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 4.80 4.57 4.54 4.56 4.82 5.28
0.50 4.79 4.54 4.48 4.45 4.68 5.17
1.00 4.78 4.51 4.44 4.40 4.59 5.04
2.00 4.50 4.39 4.32 4.47 NA
3.00 4.28 4.41 NA
4.00 4.36 NA
5.00 4.33 NA
10.00 NA

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Published: 05/10/23 Author: Thomas R. Fitzgerald