Baker Market Update – wk220610

More volatility in the bond market this week as Treasury yields edged higher and the curve flattened. The 2Yr T-Note increased over 30 basis points since Monday and currently yields 2.97%. Farther out, the 10Yr currently sits at 3.13% this morning which is around 15 basis points higher from last Friday’s close. The 30Yr long bond was largely unchanged this week and is sitting at 3.20%. Looking at various maturity spread indicators, 10s vs 2s is back down to 8 basis points and close to inverting again as it did in April this year. Other spreads such as the 5s v10s and 20s vs 30s remain negative highlighting the different kinks currently embedded in the Treasury curve. Turning to stocks, those were choppy as well with S&P 500 showing positive returns Monday and Tuesday this week followed by three days of selling off at least 1% to close out the week. Most of the action today appears to off today’s inflation report as the S&P and Dow Jones are set to finish down over 4% for the week.

Turning to economic data, last Friday, the BLS employment situation report was released for May indicating strong but slowing pace of job creation as 390,000 nonfarm payrolls were added and the unemployment rate remained at 3.6%, staying near multi-decade lows. On Thursday this week, signs of cooling were shown as the weekly initial jobless claims came in at 229,000 which is a five-month high. These weekly readings and wage growth will be key indicators as the very tight labor market begins to unwind as rates move higher.

As for other economic data this week it was light aside from today’s heavily anticipated monthly CPI report. Year-over-Year headline CPI, which includes the more volatile food and energy rose 8.6%, hitting a cycle high and a level not seen since 1981. Stripping out the more volatile items, core CPI lowered to 6.0% Y-o-Y (from 6.2% prior) but consensus forecast was expecting an increase of 5.9%. When looking at the different categories the increases were broad based but certain items to note were; food up 1%, energy up 3.9%, shelter up 0.5% and new and used were up too after falling recently. Supply chain dynamics and longer-term inflation expectations will be critical factors as the Fed navigates monetary policy to lower from current levels.

Next week, all eyes will be on the Federal Reserve as the Federal Open Market Committee (FOMC) will meet Tuesday and Wednesday for their June meeting. The fixed income market has priced in that the committee will raise the Federal Funds rate 50 basis points (same with July) but there might be some discussion of 75 basis points given the inflation report today.

US Headline Inflation hit 8.6% in May – Energy, groceries, shelter costs drive fastest rise in consumer-price index since December 1981

Source: Bloomberg Finance L.P.

 

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