May CPI Hits 40-Year High

  • May CPI disappointed markets with a hotter-than-expected read and that has sent short to intermediate Treasury yields higher once again.


  • The overall inflation rate rose a full 1.0% for the month which was well above the 0.3% increase in April and higher than the 0.7% expected. Rebounding gas prices and food were the primary culprits. The year-over-year rate rose to 8.6% vs. 8.3% in April and that level eclipses the previous cycle high of 8.5% in March and set a new 40-year high.


  • Sectors contributing to higher prices for the month were housing (0.8%), food  (1.2%), airline fares (12.6%), and transportation (2.0%). The index for gas rose 4.1% after falling -6.1% in April.


  • The service sector as a whole continues to show strong price gains as it rose 0.8% for the second straight month. This sector constitutes 60.31% of the overall index with housing taking a chunk of that at 42%. With housing activity slowing, the housing component should start to see some moderation but it’s a lagging indicator in CPI so, most likely, it won’t start to show for several more months.


  • Ex-food and energy, the results were less disappointing with the core rate increasing 0.6% which matched the rate in April but above the 0.5% expectation.


  • The YoY core rate did dip to 6.0% from 6.2% but again that was just above the 5.9% expectation. The YoY rate was helped by the May 2021 0.7% rate coming off the calculation. Next month will see an even larger 0.8% rate roll off. So peak core inflation is probably behind us but the new monthly rates will obviously need to drop to see more significant declines in YoY rates.


  • This report continues the sticky inflation scenario as price increases were fairly broad and not isolated to individual sectors. Also, the sizeable increases that continue to persist in key areas (see gas and food this month) will prevent material improvement in the overall inflation reading.


  • This report is pushing up odds that the September meeting will be another 50bps hike following a 50bps hike next week and in July. The latest fed funds futures pricing has the December 2022 rate at 2.967%. Further out, futures see December 2023 at 3.50%. That is certainly well above the Fed’s current estimate of the neutral rate of 2.4%.


  • That’s why you are seeing significant pressure on the short end of the curve this morning as investors price in additional rate hikes. We expect the Fed will revise their neutral rate forecast at next week’s FOMC meeting and that will keep the Treasury market on edge until we get past that event. And don’t look now but the 2yr – 10yr spread is down to 14bps, the lowest since early April.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.99 3.22 3.33 3.49 3.66 4.12
0.50 2.97 3.19 3.27 3.38 3.52 4.01
1.00 2.97 3.16 3.23 3.32 3.43 3.88
2.00 3.14 3.17 3.24 3.31 NA
3.00 3.21 3.25 NA
4.00 3.20 NA
5.00 3.16 NA
10.00 NA

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Published: 06/10/22 Author: Thomas R. Fitzgerald