Inflation Scares Erupt Again

  • Treasuries open the holiday-shortened week on the defensive as the highest inflation reading on record in the Eurozone sent yields there higher. Oil prices resumed their rise and signs the China lockdowns are easing also contributed to higher yields. Treasuries are playing a bit of catch-up too after yesterday’s holiday with the 10yr yield jumping 12bps higher from Friday’s close.


  • Those higher inflation numbers from the Eurozone, offset some of the better inflation readings domestically as the Personal Income and Spending Report for April showed some moderating inflation pressure last Friday. Obviously, investors are sensitive to any indication that inflation pressures are continuing.


  • Fed Governor Waller also put Treasuries on the back foot with comments that he “supports tightening by 50bps for several meetings.” He also added that “I am not taking 50bps hikes off the table until I see inflation coming down closer to our 2% target.” It should be noted Waller was the director of research at the St. Louis Fed where James Bullard presides. The consistently hawkish message from the two then is not surprising.


  • Those comments came after Atlanta Fed President Raphael Bostick commented last week that the September meeting may warrant only a 25bps hike or even a pause given where we are with inflation and the economy at that time.


  • Despite the holiday-shortened nature of the week it is chock full of first-tier economic releases headlined by Friday’s May jobs report. Expectations are for 325 thousand new jobs vs. 428 thousand in April and the unemployment rate dipping to 3.5% vs 3.6%.  Perhaps more important will be the Average Hourly Earnings figures which are expected up 0.4% MoM vs. 0.3% in April and the YoY rate slipping a bit to 5.2% vs. 5.5% the prior month. So, solid wage growth is expected to continue.


  • Labor force participation will also be closely watched with forecasts of a slight improvement to 62.3% vs. 62.2% in April. The Fed wants this to head closer to the pre-pandemic high of 63.4% and take some pressure off the tight labor market and slow the pace of wage gains. There has been some indications that older workers who left the labor force may be heading back as stock market declines and higher inflation force workers to spend down savings at a faster rate than planned. It’s still early days in this development but the Fed will be looking for signs that it is trending in that direction.


  • Before the employment report, the April Job Openings and Labor Turnover Survey will be released tomorrow and is expected to show 11.400 million job openings vs. 11.549 million. That’s not much of an expected softening in the labor market and that will keep the Fed in 50bps hiking mode.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.57 2.79 2.92 3.10 3.38 3.84
0.50 2.56 2.76 2.86 2.99 3.24 3.73
1.00 2.55 2.73 2.83 2.95 3.15 3.60
2.00 2.72 2.77 2.87 3.03 NA
3.00 2.82 2.97 NA
4.00 2.97 NA
5.00 2.92 NA
10.00 2.88 NA

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Published: 05/31/22 Author: Thomas R. Fitzgerald