Inflation Shows Signs of Slowing

Rates plummet on CPI day. Markets interpreted this morning’s CPI figures as disinflationary, sending the policy-sensitive 2-year yield to 3.91%, a -11bp move on the day. The 10-year yield fell over 8bps to 3.44%. Futures suggest that a rate cut is now more likely than a hike at the upcoming June FOMC meeting, reflected by the strong Treasury rally. Elsewhere, equities generally rose, with the S&P 500 and NASDAQ Composite climbing 0.45% and 1.04%, respectively.

CPI results show continued inflation, but offer disinflationary hopes. Today’s inflation data showed that key drivers of underlying US price pressures may be starting to recede, though one month of data is not enough to materially impact Fed policy. Services Prices excluding housing and energy, a category that the Fed is watching closely, saw the smallest increase since last summer.  Transportation services increased 11% YoY and medical services increased 0.4% YoY, but both declined on the month.  Housing inflation continues to remain elevated, with the shelter category increasing 8.1% YoY, but declining 0.2% on the month. Overall, CPI YoY registered the first sub-5% increase in two years, and observers are viewing today’s figures as broadly disinflationary.  Gregory Daco, chief economist at EY-Parthenon, said today, “whether you look at some of the goods segments…or you look at some of the services segments…they’re all indicating softening pressures.”

Day ahead. PPI will lead the session at 8:30 AM, with MoM figures expected to increase and YoY figures expected to decrease from last month’s levels. Jobless claims data will also be released at 8:30 AM, which will be followed by comments from Fed voter Christopher Waller at 10:15 AM.