Investor Attention Will Quickly Turn to Next Week’s CPI Report

Investor Attention Will Quickly Turn to Next Week’s CPI Report

• Treasury yields are slightly higher this morning but the moves are rather listless as the market awaits the University of Michigan Sentiment Survey and its inflation expectations later this morning. It’s the last bit of data in a week bereft of meaningful new inputs, but the eager bidding at yesterday’s 30yr bond auction has lent a positive underlying tone as the weekend beckons. Currently, the 10yr note is yielding 4.49%, up 4bps on the day, and the 2yr is yielding 4.84%, up 3bps on the day.

• After a week of fairly dull new news, investors will quickly turn to next Wednesday’s April CPI Report. After the softish read from the April jobs report the hope is that April’s inflation data will also break the hot streak in 2024. In that regard, core CPI is expected to increase 0.3% vs. 0.4% in March bringing the YoY pace to 3.7% vs. 3.8%. If that comes to pass, while cooler than the 0.4% prints that dominated in the first quarter it’s not likely to shift the higher-for-longer mantra to any great degree. The overall CPI rate is expected to also increase 0.3% vs 0.4% in March bringing the YoY pace to 3.4% from 3.5%. So, no great lessening in inflation pressure is expected.

• What’s more, the second half of 2024 will see more challenging base effects which will make YoY improvement more difficult. In the first half of the year several 0.4% and higher monthly prints rolled off, making for some decent YoY improvement despite the hotter-than-expected first quarter results. The second half of 2024 has more of the 0.1% and 0.2% monthly gains rolling off from last year. If we’re replacing them with 0.2% or 0.3% figures the YoY totals are apt to be frozen and that will only feed the higher-for-longer rhetoric. It’s hard to overstate the importance of the April report as it will be the last CPI numbers before the Fed’s June FOMC meeting (although they will get April’s PCE figures at the end of May).

• Before we leave this topic, let’s revisit the Fed’s 2% core PCE target. We went back and reviewed core PCE numbers all the way back to 1960 to the present and what we found was an annual average just over 3.2% (see graph below). In fact, it wasn’t until the decade following the housing bubble, and subsequent crash, that inflation remained under 2% for any length of time. The suppressed demand from that event certainly had a heavy hand in keeping a lid on inflation. That’s certainly not the economy we have today, so is it fair to be demanding we return to that level of core PCE? It’s a question Powell and other Fed members have been asked, but to date they resist even discussing the subject. Maybe when we struggle to get down to 2% in the next year it will at least be discussed more openly

• In that regard, while economic news has been sparse this week, Fed speak has not. A total of 12 speakers appeared, but Powell was not one of them. Suffice it to say, no new ground was broken by the speakers with most of the comments still focused on higher-for-longer in order to diminish demand and bring inflation lower. Even one, Minneapolis President Neel Kashkari, wasn’t as eager as Powell to take rate hikes off the table. So, if you were expecting/hoping for some softening in Fed rhetoric given the bit of softening in some recent labor data, this week didn’t deliver it.

• Before we go, we should mention the latest Fed Senior Loan Officer Opinion Survey (SLOOS) that was released this week. It found that while banks continued to modestly tighten underwriting standards across almost all loan types, the percentage doing so lessened some. It also found that demand for almost all loan types lessened as well, which has been a trend for several quarters now. If the April jobs report, and some of the other recent “softer” reports, are a harbinger of more slowing to come, we suspect underwriting standards will continue to tighten and maybe then the Fed will get that diminished demand that it is seeking and the rhetoric shifts.

Annual Core PCE Since 1960: Average Has Been 3.24% vs. Current 2.82%

Source: Bloomberg