The Market Today
May CPI Inflation Report Boosted by Continued Recovery, Disruptions
by Craig Dismuke, Dudley Carter
May Report Shows 5.0% YoY Growth in Consumer Prices, 3.8% YoY at Core Level: Headline CPI rose 0.64% MoM bringing the YoY rate of growth from 4.2% to 5.0%. Energy prices were unchanged on the month. Food prices jumped 0.4% MoM, the firmest monthly jump excluding the first three months of the pandemic since 2014. The report shows evidence of the economy continuing a resumption of normalcy. Airfares rose another 7.0% but are still down 12% from their pre-virus level. As more people resume travel, car and truck rental prices have skyrocketed, up another 12.1% MoM, while intercity transportation prices rose 2.0% MoM. Lodging prices, however, slowed their rate of recovery, up just 0.4% MoM. Apparel prices continue to recover with women’s and girls’ apparel up 2.2% MoM, toddlers’ apparel up 0.9% MoM, and footwear prices up 1.4% MoM. As restaurants reopen but struggle with hiring workers, food prices jumped 0.4% as prices for food away from home increased 0.55%, the largest monthly increase since 2008. Reflecting the continued challenges in the supply chain, specifically the chip shortage and disruption to auto manufacturing, used car prices rose another 7.3% while new car prices increased 1.6%.
Apart from the evidence of pandemic recovering and the expected-to-be temporary disruptions in the supply chain, consumer inflation figures were mixed. Owners’ equivalent rent prices rose 0.3% MoM, its firmest reading since June 2019. Medical care prices fell 0.1% MoM on declines in both services and goods. Other goods and services prices fell 0.1% MoM.
Jobless Claims Continue Consistent Improvement to New Pandemic-Era Lows: Initial jobless claims fell less than expected last week, but posted a sixth consecutive weekly decline. New claims in state programs edged down from 385k to 376k while claims in the emergency PUA program slipped 2k to 71.3k, both registering new lows since the onset of the pandemic. More encouraging, continuing claims in state programs during the week of May 29 dropped 258k to 3.499mm and claims in all programs, which include the pandemic emergency programs, declined 95k to 15.3mm for the week of May 22. The claims data have shown consistent improvement in recent weeks and will become even more interesting in the weeks ahead as many GOP-led states end access to emergency Federal programs in a bid to loosen up the supply of labor.
24 HOURS OF MARKET ACTIVITY
10-Year Treasury Yield Hit Three-Month Low Ahead of May’s Hotter-than-Expected CPI Report: U.S. equities failed to gain any momentum Wednesday during U.S. trading after futures had hovered around unchanged for most of a mixed global session overnight. As a result, the S&P 500 ended the day down just under 0.2% with underlying indications of weak risk appetite ahead of this morning’s CPI inflation report. Losses for cyclical sectors, which were led by a drop in financials, were only partially offset by others that generally benefit from falling rates. The weekly decline in Treasury yields had gathered a head of steam early Wednesday, and erased a modest mid-morning rise following a strong 10-year Treasury note auction. Despite the recent drop in yields, the awarded rate of 1.497% stopped through the when-issued yield of 1.507% from just before the auction. Echoing the strong demand, primary dealers took their lowest share of the awarded amount in five years and the bid-to-cover ratio jumped to the highest in 11 months. By the close, the 10-year Treasury yield had shed 4.2 bps to 1.491%, marking the lowest close since March 3.
Treasury yields had edged up by less than 1 bp early Thursday, trailing modestly larger increases for European yields ahead of the ECB’s latest decision and the highly anticipated U.S. CPI report. The ECB’s June statement, which was released at 6:45 a.m. CT, confirmed the $1.85 trillion size of its emergency asset purchase program (PEPP) and said officials expect “net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace [emphasis added] than during the first months of the year.” With no hint of a tapering surprise, European yields dipped from their highs but remained up on the day. After inching up further, Treasury yields were back to less than 1 bp higher just before ECB President Lagarde began her 7:30 a.m. CT press conference, the same moment the BLS released another hotter-than-expected CPI report. Treasury yields made a measured move higher to new daily highs as of 7:40 a.m. CT, with the 5-year yield up 3.2 bps to 0.78% and the 10-year yield 2.7 bps higher at 1.52%.
Infrastructure Talks Roll On: As expected, based on talks between the White House and Senate Republicans breaking down Tuesday, “focus of infrastructure talks shifted Wednesday to a bipartisan group of senators…but negotiators face the same hurdles on how to pay for any major new spending package.” According to the WSJ, “Discussions intensified among a group of centrist-leaning Senate Republicans and Democrats trying to strike a deal that would spend up to $900 billion over five years, …Sen. Mitt Romney…said…the new proposal…wouldn’t include any tax increases. “That’s a red line for Republicans,” …White House press secretary Jen Psaki said…Mr. Biden….was encouraged by the bipartisan Senate group, as well as a more fleshed-out proposal from the Problem Solvers Caucus, a bipartisan House group. The Problem Solvers on Tuesday night released a more detailed $1.249 trillion proposal over eight years…One outcome of the latest round of negotiations could be to persuade Mr. Manchin and Sen. Kyrsten Sinema (D., Ariz.), who are both involved in the talks, that a bipartisan agreement is impossible, paving the way for Democrats to muscle through an infrastructure package without GOP support.”
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Vaccine Diplomacy: Reports on Wednesday indicated the U.S. was planning to purchase an additional 500 million vaccine doses from Pfizer to share with more than 100 countries over the next two years. A separate report later in the day said the U.S. was also in discussions with Moderna about potentially purchasing doses to give away to other nations.