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CPI Largely Met Expectations;  PPI At 8:30

As argument can be made that monetary policy is now neutral.  The inflation rate as measured by the CPI is 5% and the overnight rate is 5.0%.  It is largely expected the Fed will not increase rates at the June meeting.

Placing the current CPI report into perspective, the core CPI rose 0.4% in April from the previous month, an increase that would have shocked markets before the pandemic.

Bloomberg reports from 1993 to 2019, inflation hit that mark only seven times and never exceeded it.  On a three-month annualized basis, the inflation rate is still running around 5.1%, far above the Fed’s objective.

The market has become numb to such numbers: Yields on two-year Treasury notes actually fell about 10 bps to 3.93% after the report.

The market is suggesting about 75 bps of easing by the end of the year, a direct contradiction of what policy makers are stating…the overnight rate will be over 5% at year’s end.

It is common knowledge the Administration has moved the proverbial inflationary goal posts, defined as changing how inflation is calculated so to produce a lower rate.  This is not the first time that such changes have occurred, but it is largely agreed that today’ s changes are excessive compared to past instances.

Today the PPI is released.  Will it largely meet the consensus view as the CPI did?  Analysts are expecting a 0.3% increase in the headline number and 0.2% gain ex food and energy.

Changing topics, tomorrow Speaker McCarthy and President Biden will meet again to discuss the debt ceiling.  The impasse is starting to be noticed.

Bloomberg writes the cost of insuring Treasuries against default now eclipses some emerging markets.  Bloomberg reports US credit default swaps are more expense than contracts on the bonds of Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings significantly below that of the US.

It is largely accepted that the only action worse than excessive and unsustainable spending is defaulting. 

It appears both President Biden and Speaker McCarthy are dug in.   However almost all believe an 11th hour solution will be achieved.  Hopefully this complacency will not be dispelled.

Commenting on yesterday’s market action, markets were bifurcated as the NASDAQ advanced about 1% on interest rate optimism while the Dow was flat.

Last night the foreign markets were quiet.  London was up 0.05%, Paris up 0.06% and Frankfurt up 0 .13%.  China was down 0.29%, Japan up 0.02%, and Hang Seng down 0.09%. Futures are flat ahead of the PPI.  The 10-year is up 2/32 to yield 3.42%.

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Kent Engelke

Chief Economic Strategist Managing Director

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