April CPI Hotter Than Expected

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

 

  • The overall rate rose 0.3% for the month which was well off the 1.2% increase in March but a touch higher than the 0.2% expected. The year-over-year rate ticked down to 8.3% vs. 8.5% in March but missed the 8.1% expectation.

 

  • Sectors contributing to higher prices for the month were shelter (0.5%), food  (0.9%), airline fares (18.6%), and new vehicles (1.1%). The index for gas fell 6.1% helping to keep the monthly rate from being even higher. By the way, that airline fare increase is the largest ever recorded since its inception in 1963.

 

  • Ex-food and energy the results were even more disappointing with the core rate increasing 0.6% which was easily above the 0.4% rate in March and the 0.3% expectation. None of the Bloomberg forecasters had a 0.6% rate penciled in which speaks to the size of the miss.

 

  • Also, the helping hand of lower gas prices in April will likely reverse in May as gas prices have been heading higher so far this month.

 

  • That being said, the YoY calculations will continue to be helped by some large monthly numbers from last year rolling off the calculations. April saw a 0.6% overall rate roll off from 2021 and May will see an even larger 0.7% rate roll off. So peak inflation is probably behind us but the new monthly rates will obviously need to drop to see any significant decline in the YoY inflation rates.

 

  • This report definitely plays into the sticky inflation scenario as price increases were fairly broad and not isolated to individual sectors, and the sizeable increases that continue to flare up in some areas (see airline fares this month) will continue to prevent material improvement in inflation readings.

 

  • This report is also likely to start pushing up terminal rate forecasts for fed funds. Former NY Fed President Bill Dudley was on the tape this morning, before the CPI report, speaking about a 4% or higher neutral rate compared to the 2.4% rate currently forecast by the Fed. Dudley has a history of over-estimating not only the neutral rate but a terminal rate in hiking cycles so keep that in mind, but this report today certainly plays into that theme and Treasury yields are higher across the curve as a result (see below).

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.71 2.96 3.07 3.25 3.54 4.01
0.50 2.70 2.93 3.01 3.14 3.40 3.90
1.00 2.69 2.90 2.98 3.09 3.31 3.77
2.00 2.89 2.92 3.01 3.20 NA
3.00 2.97 3.13 NA
4.00 3.09 NA
5.00 3.05 NA
10.00 NA

Securities offered through the SouthState Bank Correspondent Division ("SouthState") 1) are not FDIC insured, 2) not guaranteed by any bank, and 3) may lose value including a possible loss of principal invested. SouthState does not provide legal or tax advice. Recipients should consult with their own legal or tax professionals prior to making any decision with a legal or tax consequence. The information contained in the summary was obtained from various sources that SouthState believes to be reliable, but we do not guarantee its accuracy or completeness. The information contained in the summary speaks only to the dates shown and is subject to change with notice. This summary is for informational purposes only and is not intended to provide a recommendation with respect to any security. In addition, this summary does not take into account the financial position or investment objectives of any specific investor. This is not an offer to sell or buy any securities product, nor should it be construed as investment advice or investment recommendations.

Published: 05/11/22 Author: Thomas R. Fitzgerald