Pause Likely at June FOMC Meeting

Rates rise in volatile CPI session. Swap rates and Treasury yields rose across the curve today after reaching significant lows immediately after the CPI release. The 2-year yield closed ~9bps higher at 4.67%, an 18bp whipsaw from its intraday low of 4.49%. The 10-year yield rose ~8bps to 3.81%. The CPI figures were interpreted as positive by markets, forcing odds of a June hike to fall, equities to rally, and the “fear factor” VIX Index to fall below 15. All eyes are now on tomorrow’s FOMC decision and the following press conference.

May CPI results expected to fuel Fed Pause. CPI came in lower than last month, with MoM figures in-line with expectations. The shelter index was the largest contributor to the monthly headline increase, followed by a 4.4% increase in the index for used cars and trucks. The food index increased by 0.2% after staying flat during the prior 2 months. The energy index declined 3.6%, led by a 7.7% decline in the fuel oil index. Headline CPI was slightly below forecasts YoY, while core CPI was slightly over.
 
Though inflation eased in May and was far lower than the 9.1% YoY level recorded in June 2022, it remains above normal levels. Former chief economist at the Congressional Budget Office Wendy Edelberg said, “…if we have any hope of getting inflation down, goods prices have to fall, just outright fall…I expected that to happen many months ago.” Still, there were encouraging signs. Household furnishings fell 0.6% on the month, the first decline since June 2021. Despite the overall positive signals from today’s data, inflation remains well above the Fed’s 2% target ahead of tomorrow’s FOMC meeting where the central bank is widely expected to pause after a series of 10-consecutive rate hikes.  

Day ahead. The Fed’s FOMC decision will be announced at 2 PM ET, with a press conference to follow shortly thereafter. PPI will headline the morning’s activity.

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