Investors Await April CPI on Wednesday

Investors Await April CPI on Wednesday

• The week opens with higher yields as the regional banking crisis has calmed a bit from last week’s volatile conditions. With no news of additional lenders in trouble some risk-on sentiment has returned, and that has the flight-to-safety trades from last week reversing a bit in early trading. Currently, the 10yr is back to that familiar 3.50% level while the 2yr is yielding 3.99%.

• After the FOMC meeting and jobs report last week, the next big piece of the puzzle comes with Wednesday’s April CPI Report. Odds right now sit at 7% for a rate hike in June, but those odds will get jostled around with the CPI numbers. Expectations are for the overall inflation rate to increase 0.4% vs. 0.1% in March with the YoY pace unchanged at 5.0%. More importantly for the Fed, the core rate is expected to increase 0.3% vs. 0.4% the prior month with the YoY rate ticking down to 5.5% vs. 5.6% in March.

• The next few months will see 0.5% and 0.6% MoM rates roll off from last year so some improvement in the YoY can be had if the new MoM numbers dip below that. Unfortunately, the core rate has been in the 0.4% to 0.5% range this year which has kept the YoY pace from dipping much, and a higher-than-expected print will shift odds higher for a rate hike in June, and perhaps more obviously, reduce the odds of a rate cut in July which currently sits at 33% (see table below).

• A quarterly report that rarely created a stir in the past is due to be released this afternoon and all eyes will be upon it and that is the Fed’s Senior Loan Officer Opinion Survey. The Fed is hoping to see additional tightening in lending conditions from the survey which would allow them to feel more comfortable in holding the funds rate steady after last week’s hike.

• The responses available to the questions are a bit ambiguous with ‘tightened considerably, tightened somewhat, basically unchanged, eased somewhat, eased considerably’ the possible answers. In the prior quarter’s survey, 56.2% were unchanged, 40.6% somewhat tighter, and 3.1% saw lending standards as considerably tighter. No one replied that they were easing lending conditions. The last time easing was reported was in the April 2022 release. So, it seems to come down to how much more lenders reply that conditions have somewhat tightened and whether the tightened considerably option gets selected more than the prior survey.

• Meanwhile, the debt ceiling debate will roll along this week with the added emphasis that the latest cash flow numbers from the Treasury are not encouraging. Wrightson ICAP’s latest update over the weekend reported poorer tax receipts than previously estimated and that has them now calling the x-date beyond June 15 a toss-up. That date is important as it is the deadline for quarterly corporate tax payments that could buy the Treasury more time. The President is holding a White House meeting tomorrow with legislative leaders so look for headlines on that, but don’t expect anything definitive from the meeting.

Agency Indications — FNMA / FHLMC Callable Rates