Treasury Yields Plunge on Cooler Inflation Data

Futures markets now have two 25bp rate cuts fully priced in for 2024. Following this morning’s consumer price index (CPI) data, futures markets now have ~52bps of rate cuts priced in this year, compared to ~43bps yesterday. Rates plummeted on the day, falling ~10bps across the curve as the cooler CPI data added to the momentum from yesterday’s mixed producer price inflation data. Rates are 30-40bps lower since the end of April but remain 40-60bps higher YTD. Meanwhile, the S&P 500, DJIA, and NASDAQ rallied 0.88%-1.40%, while the VIX “fear gauge” plummeted to its lowest level (12.45) since December.

Consumer inflation retreats in April. CPI was at or below expectations in April and retreated across all measurements vs. March. Core CPI climbed 0.3% MoM, ending 3 consecutive months of above forecast higher than expected readings. On a YoY basis, CPI fell to the lowest level (+3.6%) since April 2021. April consumer spending data also came in below estimates across the board, with 0.0% MoM growth on a headline basis and a slight -0.1% pullback on a core basis. The cooler data led traders to intensify rate cutting bets for 2024.

Fed President Kashkari is still unsure how restrictive current monetary policy is. Despite recent signs of cooling inflation (including CPI today), Neel Kashkari continues to question if current monetary policy is restrictive enough. Today he stated that “the biggest uncertainty… is how much downward pressure is monetary policy putting on the economy.” According to Kashkari, the uncertainty means that the Fed should “probably” keep rates at current levels “until we figure out where underlying inflation is headed.” The comments align with Kashkari’s recent hawkish commentary, where he said last month that rate cuts may not ensue in 2024.