Powell on Capitol Hill and June CPI Headline the Week

This week Chair Powell will address committees in both houses of Congress as part of his semi-annual Humphrey-Hawkins testimony.   While we don’t expect more tapering details we could get a clearer view of the Chairman’s thoughts on the inflation threat and the implications for rate tightening. Powell, and the other Fed governors, have generally been on the side of letting the economy run a little hot to more fully boost labor gains, so we’ll be looking for any change in that position that could add more credence to the earlier hiking scenario that was reflected in the latest dot plots. We have pointed out before that despite the median dot now showing two rate hikes in 2023, there were still five  members not expecting any rate hikes through 2023, and we think Powell is one of those dots, so we don’t think we’ll hear a change in his position this week but we’ll be listening for it anyway. Speaking of inflation, tomorrow we get June CPI numbers that are expected to be a bit off from May’s results on a monthly basis but still strong historically speaking. The market has taken the pricing surge largely in stride but it will need to see some moderation in coming months for that sanguine attitude to continue. June retail sales on Friday are expected to be slightly better than May’s disappointing results.


Treasuries

Treasury Curve Today Week Change
3 Month 0.04% Unchanged
6 Month 0.05% Unchanged
1 Year 0.06% Unchanged
2 Year 0.21% -0.03%
3 Year 0.39% -0.05%
5 Year 0.78% -0.08%
10 Year 1.34% -0.09%
30 Year 1.97% -0.07%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.13%
6 Mo LIBOR 0.15%
12 Mo LIBOR 0.24%
Swap Rates  
3 Year 0.513%
5 Year 0.864%
10 Year 1.338%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Jul 13 NFIB Small Business Optimism Jun 99.5 99.5 99.6
Jul 13 CPI (MoM) Jun 0.5% 0.5% 0.6%
Jul 13 Core CPI (MoM) Jun 0.4% 0.4% 0.7%
Jul 13 Core CPI (YoY) Jun 4.0% 4.0% 3.8%
Jul 15 Industrial Production (MoM) Jun 0.6% 0.6% 0.8%
Jul 16 Retail Sales (MoM) Jun -0.6% -0.4% -1.3%
Jul 16 Retail Sales Ex-Auto & Gas (MoM) Jun 0.2% 0.4% -0.8%
Jul 16 Retail Sales Control Group (MoM) Jun 0.5% 0.4% -0.7%
Jul 16 U. of Michigan Sentiment Jul 86.5 86.5 85.5

 


Top 5 Events for the Week

July 12—16, 2021

1.  Fed Chair Powell Congressional Testimony—Wednesday/Thursday

While the latest FOMC minutes didn’t really alter the narrative that tapering discussions have begun, and that there is plenty of uncertainty on the FOMC as to the inflation threat, this week Chair Powell will address committees in both houses of Congress as part of his semi-annual Humphrey-Hawkins testimony.   While we don’t expect more tapering details we could get a clearer view of the Chairman’s thoughts on the inflation threat and the implications for rate tightening. Powell, and the other Fed governors, have generally been on the side of letting the economy run a little hot to more fully boost labor gains, so we’ll be looking for any change in that position that could add more credence to the earlier hiking scenario that was reflected in the latest dot plots. We have pointed out before that despite the median dot now showing two rate hikes in 2023, there were still five  members not expecting any rate hikes through 2023, and we think Powell is one of those dots, so we don’t think we’ll hear a change in his position this week but we’ll be listening for it anyway.

2. June CPI — Tuesday

The March and April CPI releases were the first to experience  material monthly price gains and the so-called base effect that resulted in significantly higher year-over-year prices. The May report saw historically strong price gains as well but off the April surge.  For June, overall CPI is expected to increase  0.5% versus 0.6% the prior month. The core rate (ex-food and energy) is expected to increase 0.4% versus 0.7% in May.  Overall CPI (YoY) is expected to move dip to  4.9% after last month’s 5.0% result. Core CPI (YoY) is expected to increase to 4.0% after a 3.8% rate in May. So far the market has taken the price spikes in stride, buying into the Fed’s transitory story, and while June is expected to show a plateau of sorts, the market will be looking for lower monthly price gains in the near future in order to remain docile over the inflation threat.

Source: Bloomberg

3. June Retail Sales—Friday

Retail sales have been buffeted in recent months with the impact of stimulus checks being spent in grand amounts in March and then a notable slowdown in April and May. June should provide more normalcy to what we can expect in the months ahead without the overwhelming impact of those checks and the subsequent spending. For the month, retail sales are expected to be decrease –0.4% versus a more substantial dip of –1.3% in May. Sales ex-auto and gas, however, are expected to be up 0.4% versus –0.8% in May. The retail sales control group—a direct feed into GDP—is expected to post a  0.4% increase versus a –0.7% dip in May. In all, a decent result is expected in June, especially ex-auto, after some post-stimulus check weakness in May.

4. Treasury Auctions—Monday/Tuesday

There have been no Treasury bond sales since June 25 but the supply drought will end this week with 3-year and 10-year auctions today and 30-year bonds tomorrow. With the rally that took yields to multi-month lows some backing up in yield to build a price concession seems logical, but yields will still be the lowest since February auctions so Treasury investors will be looking for how well the new supply is received. Weak auctions could spell more selling in Treasuries while strong results will lay the groundwork for a repeat attempt at last week’s yield lows.

5. July Preliminary University of Michigan Consumer Sentiment-Friday

Two-thirds of the US economy is consumption-based so gauging consumer sentiment is crucial to determining how they feel about spending. Sentiment took a hit in May as inflation expectations rose but bounced back a bit in June and a bit more lift in sentiment is expected in July. The Bloomberg consensus is for sentiment to improve slightly to 86.5 versus June’s  85.5. Sentiment peaked at 101 in February 2020 so we still have some work to do getting back to pre-pandemic levels. Inflation expectations will be watched closely after they spiked to 4.6% in May for the 1yr outlook and to 3.0% in the 5-10yr outlook. Inflation expectations this month are for the 1yr to be around 4.1% and the 5yr around 2.8%.


 

Yield Universe

 

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Published: 07/12/21 Author: Thomas R. Fitzgerald