CPI Can’t Stop the Selloff

Rates rise despite positive CPI print. Swap rates and Treasury yields dropped slightly in the morning after relatively neutral CPI data was released, only to sell-off significantly throughout the afternoon. A weak 30-year bond auction and Fed member Daly’s hawkish comments were the main drivers of the rates rise, which forced the 10-year UST yield ~10bps higher to 4.11% while the 2-year yield rose 3bps to 4.84%.

Today’s CPI print continues the year’s deflationary trend. MoM, core CPI increased 0.2%, in-line with last month and cementing the smallest back-to-back monthly gain in over two years. YoY, headline inflation climbed slightly vs. June (3.2% vs. 3.0%), while core inflation growth was 0.1% below June’s figures (4.7% vs. 4.8%). More than 90% of the overall CPI increase was due to elevated housing costs, while used-car and airfare prices posted the biggest decline since the start of the COVID-19 pandemic. Reacting to the news, Fed President Daly said the data, “came in largely as expected, and that is good news,” but she qualified the remarks by noting that the fight against inflation is not yet complete. Regardless, today’s print likely boosts odds of the Fed holding rates at the September meeting. 

PPI: another piece of the puzzle. Tomorrow’s PPI is largely expected to rise from June, which came in at 0.1% across the board, excluding core YoY at 2.4%. July’s headline and core MoM PPI is predicted to increase to 0.2%, which would be the former’s highest level seen since January. The headline YoY level is expected to see the largest increase to 0.7%, while core YoY is the lone figure predicted to decline (2.3%). The Fed will continue to search for disinflationary pressures, though next month’s data will also play a major role in September’s FOMC decision.