Cool PPI Follows Yesterday’s Cool CPI

Rates plummet again after another promising inflation print. Producer prices grew slower-than-expected in May, which further boosted confidence in moderating inflation following yesterday’s cooler consumer price data. Rates plummeted nearly 10bps today as a result, cementing a ~50bp decline from 2024 highs that were reached in late April. Strong demand at a $22B 30y Treasury auction and the highest level of jobless claims in nine months contributed as well. Rate cuts are currently priced in (by Fed Funds futures) to commence by November, and 50bps of accommodation are expected for the year.

May PPI offers another deflationary signal. Producer inflation was below estimates across conventions, and notably, headline PPI showed -0.2% deflation on a month over month basis. The decline was driven by a 0.8% overall fall in goods prices, the largest decline since October 2023, led by a 4.8% decline in energy prices. Service costs were unchanged in May. Bank of America Economist Stephen Juneau said after the release, “We see recent inflation data as greatly reducing the likelihood that the Fed has to raise rates and view labor market data as indicating that the probability of fast rate cuts is also low.”  

French government bonds continue to sell-off in European Parliament election aftermath. French bond yields have risen substantially since the recent European Parliament election showed increased popularity for Marine Le Pen and her far-right party. A call for a snap election by France President Emmanuel Macron in the aftermath created broader political uncertainty and a corresponding rise in yields. The spread between French and German 10y bond yields widened to nearly 70bps today, the most since 2017 at market close. The 10y yield is currently ~20bps higher from the beginning of the European Parliament election after reaching ~35bps higher on Tuesday.