Almost No Change in Bond Yields Despite the Unexpectedly Tame CPI Data

Just my two cents worth. I think CME Fed Fund Future investors are overly optimistic about rate cuts in July. 1. If you look at late year’s monthly inflation till July, it was high (> 8% each month) and increasing. Even a 0.4% month over month increase now will cause a decent drop in the year over year CPI number. And last year’s inflation started dropping after July so to continue a year over year drop after July becomes more difficult. 2. OPEC oil cuts start in May which I read may cause gasoline prices to increase around 7-8%. It was Energy’s 3.5% drop in today’s CPI that caused the big drop in the CPI inflation number. We likely won’t see drops like that after May. 3. Last month’s banking crisis caused consumer uncertainty which should have dampened some spending which may have improved the CPI numbers. 4. If you look at the major CPI categories, only Energy, Medicare Care Service and Used Cars and Trucks dropped in price. Food remained the same but eight categories (Shelter, Commodities less food and energy, transportation services, medical care commodies, new vehicles, apparel, etc) all increased month over month. That’s not really that great. 5. The two unknowns as far as I see is the potential commercial real estate impact if interest rates continue upward. Also shelter. At some point, CPI shelter should fall as the CPI shelter numbers catch up with the drop in current home prices, but it may be end of year before that happens.

A few things

1) Federal Reserve rolled off (QT) $49 billion of treasuries last week

2) Market knows Yellen will need to issue $500 billion to $1 trillion when debt ceiling resolved.

3) Economy weak + out of control spending:

“The federal budget deficit was $1.1 trillion in the first half of fiscal year 2023, the Congressional
Budget Office estimates—$430 billion more than the shortfall recorded during the same period
last year—and consistent with projections CBO released in February.
1 Outlays were 13 percent
higher and revenues were 3 percent lower from October through March than during the same
period in fiscal year 2022.”

Totally unrelated, but I found it interesting. A couple of weeks ago I stopped by this local convenience store where I get my morning coffee and chat with people. They told me about this woman trucker who had pulled in and had to have someone else back up her rig as she didn’t know how. Turns out, the CDL training centers are just spewing drivers out without teaching them much more than what they need to pass the written. Big shortage in truckers apparently. Lot of companies are also re-instituting dual drivers in their rigs as well. This automatically doubles the needs and costs of drivers for a company. Just a few weird things going on in an industry that I happened to notice and thought someone else could make some sense out of it.