The Market Today

CPI Report Shows Nascent Signs of Peak for Goods Inflation, Still-Problematic Inflation

by Craig Dismuke, Dudley Carter


March CPI Inflation Shows Nascent Signs of Peak for Goods Inflation, Still-Problematic Inflation: Headline CPI rose 1.2% MoM in March as expected, bringing the YoY rate up from 7.9% to 8.5%.  Food prices rose another 1.0% bringing the YoY rate up to 8.8%, the highest since 1981.  Energy prices jumped 11.0% MoM, the largest monthly increase since 2005, bringing the YoY rate up to 32.1%. At the core level, however, prices only rose 0.3% MoM versus expectations for a 0.5% gain.  This brought the YoY rate up from 6.41% to 6.47%. Both headline and core inflation are now at their highest levels since 1982.  Digging into the core items, there were some categories showing less momentum in price gains, including core commodities, auto prices, medical drugs and equipment, recreation items, education and communication items, and other goods and services.  Core goods prices fell 0.4%, the first monthly decline in 13 months.  However, core services inflation rose 0.6%, its largest increase since 1990.  Owners equivalent rents remained firm, climbing another 0.43% MoM.  The components hardest-hit by the pandemic were mixed with airfare CPI up 10.7% MoM, lodging CPI up 3.3%, but used car prices down 3.8%.  All told, there is growing evidence that perhaps goods inflation has peaked which is certainly a positive development and may be the first indicator the Fed will not have to hike as aggressively as currently anticipated.  However, services inflation continues to ramp up and food and energy prices are likely squeezing many households.

Business Confidence Falls Again on Inflation Concerns: Small business sentiment dropped more than expected in March, down 2.5 points to 93.2.  The reading is the second-lowest since early 2016.  The net number of respondents expecting business conditions to improve fell to -49, the lowest level on records back to 1974.  Inflation continues to be the largest obstacle cited by small businesses with 31% of respondents saying it is the single largest obstacle, up another 5 points from February.

Fed Communications and Treasury Statement: Fed Governor Brainard is scheduled to speak at 11:10 a.m. CT followed by Richmond Bank President Barkin (NV) at 6:00 p.m. Treasury will also release its March monthly budget statement at 1:00 p.m.


Fed’s Evans Open To 50bps in May, Neutral by Year-End: Chicago Fed President Evans, a consistent dove, said the Fed’s main objective is to move its target rate range towards neutral “expeditiously” as it seeks to pull inflation back down from historically fast rates. He currently is forecasting for the fed funds rate to reach a neutral setting early in 2023, but also noted that, “If we accelerated that so that we were there in December, that would be okay too.” “I think the optionality of not going too far too quickly is important,” Evans said, adding that officials should have a better feel by the end of the year for whether there is “some rollover in the inflation data.” Answering a question specifically related to the meeting in May, he said “50 [bps] is obviously worthy of consideration, perhaps it’s highly likely, even.”

New York Fed Survey Shows New Record for Consumers’ Near-Term Inflation Expectations: The New York Federal Reserve Bank released the results of its March Survey of Consumer Expectations on Monday. Consumers’ inflation expectations flattened out some compared with February and there were mixed changes related to the economic outlook. Expectations for inflation over the next year accelerated from 6.0% in February to 6.6%, a new record for the series which began in 2013. The median expectation for inflation over three years, however, dipped from 3.8% to 3.7%. With regards to the outlook, the New York Fed noted, “Home price growth expectations ticked up, while year-ahead spending growth expectations increased to a new series high.” However, other metrics gauging consumers’ outlook for the broader economy moderated. “Labor market and income growth expectations receded somewhat, and respondents turned less optimistic about their year-ahead household’s financial situation,” the report noted.

Fed’s Waller Warns of Possible “Collateral Damage” Caused by Aggressive Fed Plans: Fed Governor Waller, a kindred spirt to President Bullard in both his hawkishness and his rise through the ranks of the St. Louis Fed Bank, acknowledged Monday that the Fed’s aggressive plans to tighten policy do pose a risk to economic activity. “When you have to use a brute-force tool, sometimes there’s some collateral damage that happens,” Waller said, adding that the Fed is “trying to do this in a way that there’s not much of it, but we can’t tailor policy.” Rhetorically, Waller asked, “With housing – can we cool off demand for housing without tanking the construction industry? Can we cool down the labor demand without causing employment to fall? That’s the tricky road that we’re on.”


Global Bond Rout Rolls On: The recent sell-off in global sovereign debt intensified Monday as investors remained focused on global inflation and the growing possibility that central banks will be forced to respond, even if doing so creates negative ripple effects that hit economic demand. On the heels of last week’s unusually strong jump, global bond yields opened higher Monday and accelerated about the time Chinese inflation data printed hotter than expected. Producer prices rose 8.3% in March compared with a year ago, faster than the 8.1% increase expected, while consumer prices picked up from 0.9% to 1.5%, firmer than the 1.4% gain expected. The latest virus lockdowns in China have brought Shanghai subway passenger volumes to essentially zero based on certain alternative data sources and raised concerns about continued supply disruptions further aggravating global inflation pressures. Inflation fears have continued to rise across Europe since the war began and the market impact was clearly on display Monday. European sovereigns led global yields higher ahead of Thursday’s ECB meeting, pushing the 10-year German yield up 11.0 bps to 0.81%, its highest yield since 2015, and the 2-year yield 8.0 bps higher to 0.12%, its highest close since May 2014. Germany’s 10-year yield closed at -0.07% on March 1 and the 2-year yield was at -0.74%. The move in Treasury rates has been even more remarkable. While the 2-year yield slipped 1.4 bps Monday to 2.50% ahead of this morning’s CPI data, it remains sharply above its March 1 close of 1.34%. The 10-year yield added another 8.0 bps to close at 2.78%, a new high since January 2019 that sits more than 100 bps above its March 1 level of 1.73%. Interestingly, the 10-year Treasury yield rose above China’s 10-year yield for the first time since 2010. The move in yields vexed global equity investors ahead of the corporate earnings season, driving the S&P 500 down 1.7%. A Bloomberg calculation of the S&P 500 forward earnings yield showed its spread to the 10-year Treasury yield has contracted to its lowest level since 2009.


CPI report Turns Tide for Markets: After trading as high as 2.83% overnight, the 10-year Treasury yield plunged to 2.70% immediately after the release of the March CPI data. The 2-year yield fell from 2.55% overnight to 2.40%.  U.S. equity futures turned positive.

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