Inflation Forecast Hits 12-Year Peak

High price expectations fuel Treasury sell-off. Michigan consumer sentiment revealed that consumers expect prices to rise at 3.2% annually over the next 5-10 years, a 12-year high that sent rates upward throughout the late morning and afternoon. The 2-year and 10-year yields rose ~8-9bps, closing at 3.99% and 3.46%, respectively. Elsewhere, futures now suggest a ~13% chance of a 25bp hike at the June FOMC meeting and a 37% chance of a cut at the following July meeting. 

Lower wheat yields an unwanted development amidst high inflation. According to the US Department of Agriculture, U.S. wheat producers are expected to harvest about 67% of their total planted acres, the lowest harvest ratio since 1917. Drought is largely to blame – years of dry conditions in the plains region have stunted yields, with farmers resorting to filing crop-insurance claims or planting other crops. CEO of trade group Kansas Wheat said, “We’ll see short wheat, thin stands, some wheat that looks really good and a lot of fields that aren’t going to be harvested.” Futures of hard red winter wheat, the type grown in states suffering from drought, increased as much as 6.2% after the data release today, the largest intraday gain for the most-active contract since October.

Week ahead. Numerous Fed members will make comments next week, headlined by a speech from Chair Powell on Friday at 11 AM. Data will include NY manufacturing (Monday), retail sales (Tuesday), and home sales (Thursday).