Will May CPI Change the “Transitory” Narrative?

The question for this week is what would it take for tomorrow’s May CPI numbers to change the Fed’s transitory narrative as it pertains to price increases? Expectations are for a solid increase of 0.4% overall and 0.5% core month-over-month, and while that is surely high by historical standards, it would be about half the price spikes experienced in April. What if May matches those price spikes in April? Will the Fed’s position of transitory prices shift at next week’s FOMC meeting? We  don’t think so. They have been so consistent with the transitory messaging that two reports won’t shake that. Now, if June delivers price spikes for a third straight month that might change. Thus, we think the existing narrative is likely to hold at a minimum until we get to August’s Jackson Hole Symposium. After that it may be open for re-interpretation. Finally, in this week’s podcast we sat down with Dee Ann Turner, former VP of Talent for Chick Fil- A and discussed many aspects of human capital in a corporate environment: establishing and capitalizing on a positive corporate culture, effective techniques for the interviewee and effective strategies for the interviewer. The iTunes link can be found here and the Spotify here.


Price Spikes Like We Haven’t Seen in a While

Tomorrow we get the May CPI report with expectations that the overall CPI will print 0.4% and core at 0.5%. While historically speaking those are certainly lofty numbers, compared to April’s 0.8% and 0.9% they are rather tame. The question is what would it take to disturb the Fed’s “transitory” story for the near-term price spikes? The Fed messaging has been so consistent and so steady that any upside surprises in May and probably June will be ignored by them. Will the market feel the same way, especially with the graph below? So far, the market has  bought into the Fed’s messaging. We will see how that progresses into the summer.



Copper/Gold Rolling Over?

We’ve been showing the Copper/Gold Ratio versus 10yr Treasury Yields for quite some months and the latest developments are somewhat intriguing. While the spike in copper prices in early 2021 left 10yr Treasury yields in the dust, the conventional wisdom was that 10yr yields would inevitably raise to match the spike in copper prices.


As shown in the graph, however, yields have held firm, and in fact have trended lower in recent weeks. Copper prices, meanwhile, look like they are starting to roll over, perhaps moving back towards 10-yr yields. Interesting behavior to be sure, but it looks like while yields have held their ground, copper prices are starting to recede. And we are starting to see that action in other commodity prices too, like lumber, that had earlier spikes but are now reversing. Perhaps the Fed is correct that the recent moves have mostly been transitory.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.32 0.62 0.98 1.98 2.44
0.50 0.10 0.30 0.56 0.86 1.84 2.33
1.00 0.09 0.26 0.53 0.82 1.75 2.20
2.00 0.25 0.47 0.74 1.63 NA
3.00 0.70 1.57 NA
4.00 1.52 NA
5.00 1.48 NA
10.00 NA

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Published: 06/08/21 Author: Thomas R. Fitzgerald