Markets were higher after inflation cools in May

Dow gained 182, advancers over decliners better than 3-1 & NAZ was up 104.  The MLP index rose 1+ to the 226s & the REIT index added 1+ to 370.  Junk bond funds were mixed & Treasuries had a little selling, bringing slightly higher yields.  Oil rebounded 2+ to the 69s on hopes for increased demand from China & gold was off 4 to 1965. 

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Inflation showed welcome signs of cooling in May, but core prices pointed to strong underlying price pressures that are still bubbling beneath the surface & continuing to burden Ms of Americans.  The Labor Dept said that the consumer price index, a broad measure of the price for everyday goods including gasoline, groceries & rents, rose just 0.1% in May from the previous month, far lower than the 0.4% increase recorded in Apr.  Prices climbed 4% on an annual basis, slightly below the 4.1% increase forecast, marking the slowest pace of inflation since Mar 2021.  Although inflation has cooled from a peak of 9.1%, it remains about more than double the pre-pandemic average & well above the Federal Reserve's 2% target rate.  Other parts of the report also pointed to a slower retreat for inflation, a worrisome sign for the Federal Reserve.  Core prices, which exclude the more volatile measurements of food & energy, climbed 0.4% or 5.3% annually.  The report is the last before the Fed's policy-setting meeting this week & will have major implications for the central bank, which has raised interest rates 10 straight times over the past 15 months in a bid to crush out-of-control inflation.  The slowdown in inflation likely gives policymakers additional fodder to forgo another interest rate increase at the conclusion of their 2-day meeting tomorrow.  An overwhelming percentage of traders, more than 94%, now anticipate the Fed will pause the tightening cycle, a notable shift from just one day ago.  Consumers continued to see some reprieve in May in the form of lower energy costs, which fell 3.6% over the course of the month & are down 11.7% compared to the same time last year.  Other price gains proved persistent & stubbornly high in May.  Shelter costs, which account for about 40% of the core inflation increase, rose 0.6% for the month & are up 8% over the past year.  Used vehicle prices, meanwhile, increased 4.4% last month, the same as in Apr.

Inflation cools sharply to slowest pace in two years

Treasury yields were higher after a key inflation report showed price increases slowing, potentially bolstering the case for the Federal Reserve to skip a rate hike this week.  The 10-year Treasury yield added 2 basis points to 3.782% & the 2-year Treasury yield was trading higher by less than 1 basis point at 4.603%.  Yields & prices have an inverted relationship & one basis point equals 0.01%.  The CPI results (above) were in line with the estimates.  The data comes just as the Fed is starting a 2-day policy meeting.  Traders expect the central bank to hold rates steady after hiking rates for more than a year.  Traders were pricing in more than a 90% chance of no rate hike this week after the CPI report, according to CME Group’s FedWatch tool.

Treasury yields climb after CPI report shows slowing inflation ahead of Fed decision

UK borrowing costs, as measured by the yield on short-dated gov bonds, rose above levels last seen following Britain's market-destabilizing “mini-budget” after labor market data showed rising wage growth today.  The yield on 2-year gilts was up 18 basis points to 4.828%, surpassing the 4.75% set on Sep 28 & marking the highest level since Jul 2008.  UK annual average wage growth excluding bonuses accelerated from 6.7% to 7.2% in the Feb-Apr qtr, the fastest rate on record.  The forecast expected 6.9% wage growth for the reported first period since the national hourly minimum wage was increased to £10.42 ($13.10), from £9.50.  Real pay, adjusted for inflation, showed pay growth was down by 2% including bonuses & by 1.3% excluding them.  The report from the British Office for National Statistics showed the employment rate rose 0.2 percentage points over the same period, as the number of people in work hit a record high.  Unemployment was 0.1 percentage points higher because of a decline in the number of “economically inactive” people not in work or looking for work.  Economists were quick to forecast a sharp rise in gilt yields on the back of the data, which fueled expectations for the Bank of England's rate hikes.  The central bank is attempting to tame price rises that are among the steepest of all developed economies, coming in at 8.7% in Apr.

UK short-term borrowing costs shoot past ‘mini-budget’ crisis levels on strong labor data

While the inflation data was generally favorable, more work will be needed for continued improvement.  Tomorrow the producer price index will be released which will give a glimpse of upcoming inflation.

Dow Jones Industrials