Published Date 7/13/2022
Inflation on fire; June CPI expected to have increased to 8.8% annually, increased 9.1% a huge miss compared to consensus estimates; the highest inflation in 41 years (1981). Core prices, a measure that strips out volatile food and energy components, increased by 5.9% in June from a year ago, a slightly slower pace than May’s 6%, the Labor Department said Wednesday. On a month-to month basis, core prices accelerated slightly to 0.7% in June compared with the prior month, when they rose by 0.6%. Gasoline far outpacing other categories with an 11.2% gain over the prior month. Gasoline prices have been on a downward path in recent weeks, crude oil declining on concerns demand will slow as global economies move deeper into recessions.
June CPI m/m 1.3% from 1.0% in May; yr./yr. +9.1% from 8.6% in May. Core m/m +0.7% from +0.6% in May, yr./yr. +5.9% down from 6.0% in May.
The initial reaction is about what we would expect, the 10 yr. note yield at 9 am 3.06% +8 bps, the 2 yr. note 3.21% +16 bp, MBS prices -50 bps. Prior to the report markets were expecting a 75 bp increase in the FF rate at the FOMC meeting later this month. Once again, the initial reaction sent the Swap market pricing in a possibility that the Fed will implement a 100-basis-point hike in July. The rate on the July contract rose as high as 2.416% after the CPI data, some 83.6 basis points above the current effective fed funds rate. That implies a hike of at least 75 basis points is seen as definite and around a one-in-three chance that it could be a full percentage point.
The US dollar continues to increase against all major currencies, the data this morning sending the dollar index top another new high. This morning the euro fell to parity with the dollar, currency slipped as much as 0.4% to touch a low of $0.9998. The dollar has been in favor this year as a haven investment, helped by higher US interest rates, and there’s been speculation the rally could spur global policymakers to intervene to weaken it at some point.
Inversion between the 10 yr. and 2 yr. note now +16 bps.
At 9:30 am the DJIA opened -379, NASDAQ -200, S&P -51. 10 yr. note 3.03% +5 bp (the high earlier 3.08%). FNMA 5.0 30 yr. coupon at 9:30 am -27 bps and -67 bps from 9:30 am yesterday.
The 10 yr. note yield is holding well given the inflation spike, it still remains in its wide trading range. Global demand for the dollar and higher interest rates is a counter driver against US inflation. After the volatility on the CPI at 8:30 am, by 10 am the rate markets have settled. Some support for treasuries driven by the weakness in equity markets.
Source: TBWS
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