Inflation Hot Again

Morning data pushes rates higher before afternoon Treasury rally. Swap rates and Treasury yields rose across the curve following multiple economic data beats, including PCE, personal income, and personal spending. The move was reversed throughout the afternoon, however, with rates falling into the close. The 2-year yield reached a high of 4.64% on the session but now sits at 4.56%, while the 10-year yield fell 2bps to 3.80%

Rate hike potential increases at upcoming meetings following hot April PCE. PCE exceeded expectations for April across the board and was elevated versus March. Following the data, Cleveland Fed President Mester said, “When I look at the data and I look at what’s happening with inflation numbers, I do think we’re going to have to tighten a bit more…everything is on the table in June.” MoM, goods prices increased 0.3%, services increased 0.4%, food prices decreased less than 0.1%, and energy prices decreased 0.7%. Within goods, the largest increase was in new domestic cars, which climbed ~17.3%, while the sharpest decline was audio discs, which declined 1.7%. Within services, the largest increase was motion picture theaters, which increased ~57.6%, while the sharpest decline was exchange-listed equities, which was down ~17.1%. A combination of this strong inflation print, a personal spending beat, hawkish Fed speak in recent days, continued business investment and a persistently strong labor market have driven June hiking odds to ~66%, up from ~18% just one week ago. Still, some Fed officials have stressed that the impact of banking failures on credit conditions has not been fully realized and reiterated the lagged effect of monetary policy.

Week ahead. Friday’s NFP, unemployment rate, and hourly earnings figures will highlight the schedule. PMI will be released on Thursday.Fed members Michelle Bowman, Patrick Harker, and Philip Jefferson will make public comments.