Inflation Slows in May

Long end of the swap curve spikes despite slowing inflation. Today’s inflation figures showed progress toward the Fed’s stated 2% target, while University of Michigan inflation expectation data was below estimates (3.0% for both 1 year and 5-10 year). Despite the prints, rates rose 5-8bps on the long end of the curve and 1-3bps on the short end. The disconnect was likely due to higher-than-expected University of Michigan consumer sentiment (68.2 vs. 66.0 forecast), as well as quarter-end repositioning. Meanwhile, equities closed the week on a sour note, with the S&P 500, NASDAQ, and DJIA all down 0.20%-0.50%.

Today’s inflation data helps case for Fed cuts. May PCE inflation was below April’s figures and in-line with expectations across all measures. Notably, headline inflation was 0.0% on a month-over-month basis, while core inflation was 0.1%. On both a headline and core basis, PCE advanced 2.6% year-over-year. Chief Investment Officer at CIBC Private Wealth Dave Donabedian said, “From the market’s perspective, today’s PCE report was near perfect…” adding that today’s data showed inflation is moving towards the Fed’s target while strong consumer spending data (released today) highlighted continued economic resilience.

France and Spain inflation decelerates. France received some positive news ahead of its upcoming parliamentary election, as inflation slowed to 2.5% from 2.6% previously. The data matched forecasts, and consumer price growth is now just off its multiyear low of 2.4% (reached in April and March). Meanwhile, Spain inflation dropped to 3.4% from 3.6% year-over-year, while month-over-month price growth remained flat at 0.3%. The deceleration came after the ECB reduced its policy rate by 25bps a few weeks ago, and ~44bps of incremental rate cuts are currently priced in for 2024.