Baker Market Update – wk220414

It was a week of steepening for the yield curve. Two- and five-year Treasury yields drifted lower approximately ten basis points (2.40% and 2.69%) while the 10-year dropped four basis points (2.74%) and the long bond (30yr 2.85%) drifted higher five basis points as of Thursday morning. With the recent drop in shorter term yields it could suggest that investors are beginning to doubt that the Fed will follow through on its Hawkish comments. The often talked about 10s vs 2s spread has increased to 34 basis points from previously reaching a low of negative eight basis points in early April. The recent movement in yields came after Vice-Chairwoman Lael Brainard’s comments last week about inflation being the most important risk to the US Economy. Bond market participants are busy analyzing the market impact of the Federal Reserve’s Balance sheet unwind which is underway decreasing the balance sheet no more than $95 billion per month going forward. There has also been discussion of selling securities to further help reduce the balance sheet. In the equity markets it was a bouncy week with the S&P 500 index looking to finish down about 1.3% from a week ago but still up more than 6.5% from the lows hit in early March this year.

Inflation continued to rise at the fastest pace in 40 years as we saw the March CPI and PPI reports this week. Headline CPI came in at 8.5% year over year and core (which strips out food and energy) was 6.5%. The headline figure was lead in large part by the 18.3% month over month jump in gasoline prices. The good news in the March report was that core price pressures finally appear to be moderating. After a series of half a percent increase over the last few months, it increased only 0.3%. There was a pop in the core services price readings but this was largely attributed the post-Omicron activities. As Fed officials continue to remain very hawkish, the March data won’t likely alter their plans to increase rates 50bps in their meeting next month. Most economist are expecting inflation to peak now and fall later this year.

On Thursday, retails sales increased 0.5% month over month. Similar to the inflation prints for March, retail sales were also influenced by the surge in gasoline prices. As workers continue to return to offices and travel there should be further boosts in the restaurant and bar sectors. However as real incomes continue to fall with higher inflation and higher interest rates consumption growth will be subdued. Also released today was the University of Michigan Consumer sentiment survey which saw a small rebound as the recent drop in gasoline prices provided some reprieve for consumers.

Next week’s economic calendar is rather light. We will see a slew of housing data including NAHB building permits, mortgage applications and existing home sales. There will also be a handful of Fed Speakers on the circuit before their blackout period which begins Saturday. Happy Easter to All!

Contributions to March CPI (Month over Month)

Breaking down headline CPI for March – energy prices contributed the majority of the increase for headline prices (1.2% month over month). While the Fed was slow to realize inflation the initial surge in inflation was not transitory they might also be too pessimistic about how quickly inflation could drop back.

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Matt Harris, CFA

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