Rates jump after consumer prices blow past expectations

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Published Date 5/12/2021

Interest rates edged up at 8:30 am ET this morning when the April consumer price data was released. The forecasts for CPI +0.2% after increasing 0.6% in March, as reported +0.8% m/m, the most since 2009; yr/yr expected +3.6% increased 4.2%. The core (ex-food and energy) thought to be +0.3% jumped to +0.9% m/m, yr/yr forecasts at +2.3% increased 3.0%. The initial reaction increased the 10 yr from 1.62% to 1.65%, and FNMA 2.5 30 yr coupon fell 11 bps from yesterday’s 33 bp decline. Given the minor reaction, investors and traders are talking about inflation daily, but the reaction initially doesn’t clear the decks completely. The data showed a 10% surge in the cost of used vehicles that accounted for more than a third of the increase in the overall CPI—tempered by the Fed’s constant comments that any inflation won’t be much and won’t last. Powell and Yellen are holding the view the increases are just reactions to the pent-up demand over the last year. While the reaction this morning is not much, swelling consumer demand has also given firms more confidence to pass along some of the new costs. If sustained, the production bottlenecks could pose a risk of an acceleration in consumer inflation.

Earlier this morning, weekly MBA mortgage applications last week; the composite increased 2.1%, purchase apps +1.0%, and refinances now expected to taper increased 3.0%.

Gas lines are increasing across the east coast with the Colonial Pipeline cyberattack. The pipeline isn’t back online, and comments from the company aren’t encouraging for the next week. It is one event that will push May’s CPI data higher than otherwise but really is a short-term bump. Hoarding is rampant, like toilet paper a year ago. The pipeline Co. told federal officials it will know by late today whether it’s safe to restart gasoline and diesel shipments that have been on hold since criminal hackers targeted the company last week;. Even when it gets a green light, it will take at least a week to get back to norms.

At 9:30 am ET, after strong declines in the key indexes yesterday, the selling continued. The DJIA opened -108 after falling 474 yesterday, NASDAQ -161, S&P -27. 10 yr at 9:30 am 1.67% +5 bps. FNMA 2.5 30 yr coupon at 9:30 am -30 bps from yesterday’s close, and -46 bps from 9:30 am yesterday.

This afternoon at 1:00 pm, Treasury will auction $41B of new 10 yr notes; the background of the CPI this morning adding additional strength to the view of increasing inflation will test that idea. Demand for the note will be key.

At 2:00 pm ET, Treasury will report its March monthly deficit, forecasts at -$349.0B.

The 10 yr note is now on the path to move up to test its high at 1.74%. Last Friday, the knee-jerk reaction to the employment data the 10 yr fell very briefly to 1.49% before climbing back to 1.56% unchanged from Thursday’s close. As of 10:00 am ET this morning, the 10 yr note rate has increased 18 bps in 2.5 days from the low Friday.

Source: TBWS

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