Treasuries Trade Weaker as Supply and More Inflation News Awaits

  • Treasuries are trading weaker today as $22 billion waits to be auctioned this afternoon. After yesterday’s so-so 10yr auction discretion appears to be the better part of valor today. Also, tomorrow and Friday offer more inflation news with PPI tomorrow and Import/Export prices on Friday. Expectations are for bond-friendly numbers, but traders may be holding back until the event risks pass.  Presently, the 10yr Treasury is yielding 4.18%,  down 7/32nds in price while the 2yr Treasury is yielding 4.61%, down 1/32nd in price.


  • Some thoughts on CPI. While the monthly gains were above expectations, the trend towards lower YoY rates continued for the core as unrounded the gain was 0.358%, so call it a skinny 0.4% when rounded. Also, Owners Equivalent Rent declined to 0.4% from 0.6%, and with the largest single weighting in the CPI basket at 26% it obviously influences the direction of inflation. Food costs moderated too with food at home unchanged while food away from home rose just 0.1%, well off the 0.5% January print. The beat on core came mostly from healthy airfare increases and apparel. Also, the key core services ex-housing number improved from 0.85% to 0.47% but that’s still above the 0.2% to 0.3% that the Fed would like to see. This is the “sticky’ part of inflation right now.


  • In addition, the reduction in food inflation isn’t part of the core number (remember ex-food and energy), but it is included in core PCE. Also, the airfare category is not in core PCE, so the impact of both is to imply the potential for a decent PCE inflation number at month-end.


  • Speaking of PCE, tomorrow we receive February PPI numbers. Expectations are for final demand to be up 0.3% matching the January gain, while core PPI is expected to increase 0.2% vs. 0.5%. Final Demand PPI YoY is expected to increase slightly from 0.9% to 1.2% while core PPI YoY is expected to be up 1.9% vs. 2.0% in January. Recall, some of the PCE data is pulled from PPI so it will give us another indication of what to expect from the Fed’s preferred inflation gauge.


  • Away from inflation news, tomorrow also brings February retail sales. Expectations are that February had a nice pick-up in spending after soft weather-impaired January numbers. Overall sales are expected up 0.8% vs -0.8% in January while sales ex auto and gas are expected up 0.3% vs. -0.5% in January. The control group category (GDP data) is expected to reverse the January dip 0.4% vs. -0.4%. So, with better weather, the consumer is expected to have returned to their spending ways in February.  The spending and inflation numbers so far seem to imply a Fed continuing to maintain existing policy until more improvement in inflation and signs of a slowing labor market definitively appear.

Core Services Ex-Housing: Improved From January But Still Too High

Source: Bloomberg

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Published: 03/13/24 Author: Thomas R. Fitzgerald