All Eyes on CPI Tomorrow

Yields close nearly flat ahead of inflation data tomorrow. Treasury yields declined ~3 bps this morning before positive trade negotiation developments spurred a risk-on move. The policy-sensitive 2-year yield closed 4 bps above intraday lows and up 1.5 bps today, now at 4.02%, while the entire curve closed within 2 bps of opening levels. Equities generally rose today, with the S&P 500 and NASDAQ up ~0.60%, extending their multi-month highs. Markets are now looking ahead to CPI data tomorrow, where core readings are expected to rise by 0.1% in May from April.

U.S. working towards trade deals with China and Mexico. Optimism that the U.S. will soon reach trade deals with China continued to grow after discussions between the two countries continued today in London. Commerce Secretary Lutnick said that the negotiations are “going really, really well,” and that talks could continue tomorrow “if they need be,” though they may end tonight. Meanwhile, news broke today that the U.S. and Mexico are nearing an agreement that would remove 50% tariffs on steel, up to a certain volume of imports. Lutnick has reportedly led the discussions with Mexico while President Trump (who has not yet been directly involved) would have to sign off on the deal.

U.S. oil output to fall in 2026. Lower oil prices and a slowdown in output from a key oil producing region are expected to contribute to lower U.S. oil production in 2026, according to the Energy Information Administration’s (EIA) short-term outlook released today. Production is expected to fall from 13.42 million barrels per day in 2025 to 13.37 million in 2026, a 120,000 decline vs. projections released in May and the first annual output reduction since the COVID pandemic. Oil producers have warned that production has peaked already, and lower oil prices are likely to contribute to further pullbacks in output. In addition, the EIA estimates that fewer active drilling rigs means less new oil wells be produced through 2026. Crucially, shale output from the Permian Basin has declined, and producers appear to be positioning for production slowdowns as they wait for higher oil prices. The outlook appears to be a roadblock to President Trump achieving his goal of U.S. energy independence, after he declared an energy emergency soon after starting his second term.