Inflation Was Slightly Higher Than Expected in March

Rates decline after inflation data avoids a significant upside surprise. Markets breathed a sigh of relief after personal consumption expenditures (PCE) were only slightly higher than expected on an annual basis in March. Treasury yields/swap rates reversed a portion of yesterday’s rise and declined 1-4bps across the curve in a bull flattening pattern. Equities climbed on the PCE data while the “magnificent seven” (namely Google) powered a broader rally. Google rose nearly 10% today after Q1 results exceeded expectations, coupled with their first ever dividend and $70B stock repurchase.

PCE near expectations, but still points to persistent inflation. March PCE inflation was in-line with expectations on a core and headline MoM basis (0.3%), and on a YoY basis, both conventions were only 0.1% above forecasts. Still, YoY inflation climbed vs. February, remaining solidly above the Fed’s 2% target at 2.7%, and the data failed to dent recently baked expectations of higher-for-longer interest rates. Commenting on the release, JPMorgan chief economist Bruce Kasman said, “There’s both a story here about the economy holding up very well…as well as inflation pressures being persistent…I think the case for Fed easing here is pretty small any time soon.”

Yen falls after BOJ holds rates steady. The BOJ announced that they would keep rates at near 0% last night, holding true to their guidance that any incremental rate hikes would be gradual. The yen extended its decline to its lowest level since 1990, nearing 158 per dollar. The decline persisted despite the BOJ’s greater conviction that inflation will hit their targeted 2%, while BOJ Governor Ueda said that rate hikes will come if their prediction materializes. Futures currently have ~22bps of hikes priced in by the end of 2024.