FOMC Meeting, CPI Loom Large

Rates mixed ahead of FOMC meeting commencement. Swap rates and Treasury yields were mixed today, the 2-year yield falling ~2bps to 4.58% while the 10-year yield held steady at 3.74%. The move came on the eve of CPI and the start of the June FOMC meeting, where a decision will be announced on Wednesday. Futures currently suggest a ~25% probability of a 25bp hike on Wednesday and a much larger chance of a hike at the July meeting. Elsewhere, equities rose on the day, the S&P 500 and Nasdaq 100 closing at their highs since April 2022.

CPI Preview. May CPI is being closely watched as many expect a lower-than-forecasted print to solidify odds of a Fed pause on Wednesday, as recent economic data continues to paint an opaque picture. Home inventory slid in May, and prices rose 1.4% MoM. Signs of consumer strain, including lower-income households, remained sparse with more discretionary credit card spending across all income groups. Lower and middle-income consumers appeared to remain liquid as their credit card to debit card spending ratio remained below pre-pandemic levels.

Former Treasury Secretary Lawrence Summers recently provided his opinion, stating “The United States is, today, an underlying 4.5 – 5% inflation country.” Conversely, some on the street see bond traders overestimating continued inflation, as noted in an analysis by Citigroup Strategist Raghav Datia. He points out that inflation expectations over the next 2-years are higher than at the start of 2023, despite 2-consecutive CPI prints below estimates, comparatively tighter financial conditions, and higher unemployment and jobless claims than at the start of the year.

Day ahead. The June FOMC meeting begins tomorrow. CPI will lead the day at 8:30 AM, while crude oil figures will follow in the late afternoon.