Published Date 6/10/2022

May CPI hotter than expectations. CPI expected +0.7% increased to 1.0%, yr./yr. expected +8.2% increased 8.6%; the core (ex food and energy) expected +0.5% increased 0.6%, core yr./yr. expected +5.9% increased 6.0%. The initial reaction sent stock indexes lower, the 10 yr. note rate unchanged from yesterday. The 10 yr. didn’t increase until about 9 am ET then increased 6 bps. MBSs at 8:30 am -22 bps, at 9:30 am -47 bps.

The increase in interest rates is at the low end of the curve, the high end of the curve held well; 2 yr. note at 9 am +12 bps while the 10 yr. note up just 2 bps at 9 am. The data reinforce that inflation is still heated by many measures, and that the Fed — which has committed to half-point hikes at each of its next two meetings, starting next week — will have to maintain that aggressive stance through its September gathering. Record gasoline prices and geopolitical factors threaten to keep inflation high in the coming months, suggesting the Fed will have to pump the brakes on the economy for longer. Prior to this data this morning there was a debate about what the Fed will do, universally two 50 bps increases in June and July but what about Sept, after this report markets will expect another 50 bps.

In May, prices for necessities continued to rise at double-digit paces. Energy prices climbed 34.6% from a year earlier, the most since 2005, including a nearly 49% jump in gasoline costs. Gas prices so far in June have climbed to new highs, signaling more upward pressure in coming CPI reports, grocery prices rose 11.9% annually, the most since 1979, while electricity increased 12%, the most since August 2006. Rent of primary of residence climbed 5.2% from a year earlier, the most since 1987. The job market remains a bright spot, but decades-high inflation is crippling confidence among the American people and largely outpacing wage gains keeping the Fed in the hot seat. The Fed is well behind the curve relating to inflation. Expect increasing dialogue to being floating that the Fed may shock markets by increasing 100 bps next week, that is highly unlikely, but the Fed should do it, at the end of the day the Fed still worries about how markets will react to its policy moves.

At 9:30 am the DJIA opened -506, NASDAQ -195, S&P -62. 10 yr. 3.11% +6 bp. FNMA 4.5 30 yr. coupon -45 bps and down 69 bps from 9:30 am yesterday.

At 10 am the mid-month U. of Michigan consumer sentiment index expected at 58.5 from 58.4 in May, the index collapsed to 50.2, the lowest since 1978. Current confidence 55.4 from 63.3, consumer expectations 46.8 from 55.2. Consumers losing confidence as inflation sucks money from incomes.

At 2 pm this afternoon, May Treasury budget expected -$275.0B.

Next Tuesday May PPI, FOMC next Wednesday.

Source: TBWS

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