Treasuries Rally on Cool CPI/PPI, “Strong Auction Demand” – Fed Needs to See More
Last Friday saw treasuries jump on a (supposedly) “hot” jobs report with the 10-year settling at 4.46% early this week. The monthly jobs report is coming under scrutiny as it relies on survey data compiled by the Bureau of Labor Statistics. The BLS is dealing with funding issues and plummeting participation rates. This week’s inflation and jobs data indicate a cooling inflation and jobs outlook. Wednesday’s CPI report came in much cooler than expectations. Monthly increase was 0% (first 0% monthly reading in 2 years), monthly core came in at 0.16% (which annualizes to 1.92% – below the Fed’s 2% target), and supercore (which removes housing costs) came in at a negative 0.04% (first negative supercore reading in 3 years). The hits keep on coming this week. Yesterday’s core PPI (Producers Price Index which is a preview of future core CPI) came in at 0% and then today’s Import Price Index came in at negative 0.3%. Speaking of employment, the weekly initial jobless claims hit a 10-month high yesterday. Note that that is based on actual claims, not a survey. The 10-year rallied to 4.22% as of today.
Are We There Yet? The Fed meeting this week saw them leave rates unchanged and Fed Chair Powell commented, “…the evidence is pretty clear that policy is restrictive and is having…the effects that we would hope for…eventually you will see real weakening in the economy.” The new Fed “dot plot” of predictions was released this week. It shows Fed policy makers divided on whether to expect one or two rate cuts this year. It also showed the Fed expects the year to end with PCE inflation at 2.6% (note that the March dot plot expected 2.4%). This means that the Fed is prepared to start cutting before hitting the magic 2.0% inflation target (the dot plot indicates 2.0% won’t be achieved until 2025/2026). This puts employment “slack” in the spotlight for the Fed. It needs to see job market weakness to cut rates, hence the “weakening in the economy” remark from Powell. And Powell dropped a bombshell of sorts in his post meeting comments as he said, “There is an argument that payrolls may be a bit overstated.” The Fed Chair calling into question the data from a government agency is significant. Bottom line, the Fed needs to see more months of sustained progress on inflation before cutting rates, more from Powell, “We don’t see ourselves as having the confidence…to loosen policy at this time.” So we are on a long trip, the driver says we aren’t there yet, but we are on our way. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners.