The Market Gets Another Inflation Number This Week

After the FOMC minutes last week put a bit of a scare into markets with taper talk mentioned, cooler heads prevailed and Treasuries managed to recoup trading losses from that day and moved further lower in yield as the week concluded and investors became more assured that taper talk wouldn’t be taking place anytime soon. The best bet remains the August central bank symposium in Jackson Hole with thoughts they will lay out a late fourth quarter 2021 or early first quarter 2022 initiation of said tapering. That will likely consume most of 2022 with interest rate hikes set to follow, if all is still going well in the economy. In the meantime, we have eight Fed members speaking this week which will surely generate some headlines around their most recent thoughts on inflation. To date, they have presented a united front that the increases noted in the April CPI report are transitory so any change from that will create a stir in Treasuries, but for now the range trade of 1.60% – 1.70% in the 10yr remains.  Apart from Fed speak, the personal income and spending numbers on Friday are expected to show spending holding its own after a big stimulus-check inspired spike in March. The all important inflation number in the report that the Fed prefers (Core PCE) is expected to increase 0.6% MoM and 2.9% YoY from 1.8% in March.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.00% Unchanged
6 Month 0.02% Unchanged
1 Year 0.04% Unchanged
2 Year 0.15% Unchanged
3 Year 0.32% Unchanged
5 Year 0.82% +0.01%
10 Year 1.61% -0.02%
30 Year 2.31% -0.02%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.15%
6 Mo LIBOR 0.18%
12 Mo LIBOR 0.26%
Swap Rates  
3 Year 0.443%
5 Year 0.900%
10 Year 1.588%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
May 24 S&P CoreLogic CS 20-City YoY Mar 12.25% 12.55% 11.94%
May 25 New Home Sales Apr 950k 950k 1021k
May 25 Consumer Confidence Apr 119.5 118.9 121.7
May 27 Durable Goods Orders Apr 0.7% 0.8% 0.8%
May 27 Durable Goods Orders Ex-Transportation Apr 0.7% 0.7% 1.9%
May 27 Pending Home Sales (MoM) Apr 0.5% 0.5% 1.9%
May 28 Personal Income Apr -14.8% -14.8% 21.1%
May 28 Personal Spending Apr 0.5% 0.5% 4.2%
May 28 Core PCE YoY Apr 3.0% 2.9% 1.8%

Top 5 Events for the Week

May 24— 28, 2021

1.  Fed Speak—All Week

After the FOMC minutes last week put a bit of a scare into markets with taper talk mentioned, cooler heads prevailed and Treasuries managed to recoup trading losses from that day and move further lower in yield as the week concluded and investors became more assured that taper talk actually wouldn’t be taking place anytime soon. The best bet remains the August central bank symposium in Jackson Hole with thoughts they will lay out a late fourth quarter 2021 or early first quarter 2022 initiation of said tapering. That will likely consume most of 2022 with interest rate hikes set to follow, if all is still going well in the economy. In the meantime, we have eight Fed members speaking this week which will surely generate some headlines around their most recent thoughts on inflation. To date, they have presented a united front that the increases noted in the April CPI report are transitory so any change from that will create a stir in Treasuries, but for now the range trade of 1.60% – 1.70% in 10yr remains.

2. April Personal Income and Spending—Friday

The personal income and spending numbers have been volatile of late with stimulus checks flowing through the income numbers in March and flowing through the spending numbers in March and April.  For example, personal income is expected to decrease  -14.8 versus a 21.1% gain in March. The two-month expected average is an increase in income of 6.3%, so very respectable.  Personal spending, meanwhile, is expected to have increased 0.5% versus a 4.2% pop in March. While on paper a 0.5% gain does not look impressive, by managing to hold onto the spike in spending in March it works out to a very respectable result.  The all important inflation number in the report that the Fed prefers (Core PCE) is expected to increase 0.6% MoM and 2.9% YoY from 1.8% in March, quite the spike.

Source: Bloomberg

3. May Consumer Confidence—Tuesday

With two-thirds of the economy consumption-based it’s always important to look at the confidence of the consumer for tells on future spending and hence GDP.  For May, confidence is expected to hold onto most of its spike in April with a 118.9 reading versus 121.7 in April.  Confidence levels are approaching the pre-pandemic highs in the  130’s which speaks to the impact that spreading vaccines and further re-openings are having on confidence readings. The expected solid read on confidence points to increased consumer consumption in the months ahead.

4. April Durable Goods Orders—Thursday

The manufacturing side of the economy has been strong since early in the pandemic, not having the face-to-face constraints of the more service-oriented businesses. Consumer consumption has also focused more on hard goods over services and durable goods orders have followed suit in posting solid activity during much of the pandemic. The current thought is that with the economy reopening more and more that the services-side of the economy will take a hand-off from the manufacturing side and carry the economy in the second half of 2021. In the meantime, for April, orders are expected  to increase 0.8% which would match the increase in March. Orders less the volatile transportation sector are expected to increase 0.7% versus 1.9% in March. So it looks like the durable goods side of the economy will continue it’s solid performance through April.

5. April New and Pending Home Sales—Tuesday/Thursday

While new home sales only account for about 10% of the housing market they do bring with it all the elements that go into the construction of a home and so it is an important input to GDP and also to the health of the housing market. For the month of April, sales are expected to dip after March’s rebound after a weak weather-impacted February. Sales are expected to decrease 7.0% month-over-month to 950 thousand units sold on an annualized basis. Some of the slowing could be from a lack of inventory and also from price increases after lumber costs reached new highs in April. Pending home sales are based on contract signings so they represent a good real-time tell on the state of the housing market and for April sales are expected to increase a skinny 0.5% after gaining 1.3% in March. Thus, a bit of slowing in activity is expected in April and given the ramping prices/costs and lack of inventory that’s not altogether surprising.

 


 

Yield Universe

 

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: 05/24/21 Author: Thomas R. Fitzgerald