Robust US Economic Data Puts Fed in Focus

US stocks are paring some of yesterday’s gains while the Treasury curve is flattening after a series of robust US economic releases boosted Fed tightening speculation.  The primary driver was April CPI, which showed consumer prices increased the most in over three years last month.  Rising rents and an 8.1% surge in gasoline prices were the main contributors to the largest gain in CPI since February 2013.  Headline CPI has now increased 1.1% over the last 12 months, up from 0.9% in March, while core prices have risen 2.1% y-o-y.  Separate reports showed new housing starts rose more than expected in April, and US factory output increased for the first time in three months.  The factory data indicates that the manufacturing sector may have finally bottomed out, and that a decline in the dollar this year may be having an impact on manufacturing exports.  When you also factor in last week’s robust retail sales report, a case could be made that the Fed’s data-reliant rate policy may be leaning towards tightening sooner rather than later. 

In addition to this week’s economic data, the markets will get a look at the April FOMC meeting minutes tomorrow at 2pm ET.  Several central bank presidents indicated last week that a June or July hike is on the table, and the minutes should provide some additional visibility into the likelihood of that happening.  Since the FOMC last met on April 26-27, recent reports have showed the weakness in the first quarter hasn’t carried over to Q2, however certain risks to the outlook still remain.  The next FOMC meeting is June 14-15, just over a week before the Brexit referendum vote, which could cause the Fed to pause ahead of that possible instability.
 
All three major US stock indexes are currently down close to 0.50%, while Treasury yields and swap rates are 1-2 bps higher in the front of the curve and flat to 2 bps lower in the belly and back end of the curve.  WTI and Brent crude are both up marginally following yesterday’s robust gains.