The Consumer Price Index (CPI) rose 0.6% in March from February, the Labor Department reported this morning. Year over year consumer prices are 2.6% higher than they were in March 2020. Economists had projected that the headline CPI would climb 0.5% in March from February and 2.5% year over year. Financial markets shrugged off the numbers.
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index fell 0.2% month to month in February from January. That was below economist expectations of a 0.5% month to month gain. On a year over year basis, the headline PCE Price Index climbed 1.6%, according to the U.S. Bureau of Economic Analysis. That was in line with economists’s projections.
This weeks long list of Treasury auctions started off today with a very good sale of $60 billion in two-year notes today. Today’s sale came with a yield of 0.152%–yep that’s where interest rates are right now–on the two year note. That matched the bid in the when-traded market. Total bids amounted to 2.54 times the amount of debt offered. It’s a good sign when bids exceed the amount on sale. In February the bid-to-cover ration was 2.44 times. The yield on the benchmark 10-year Treasury fell 7 basis points today to 1.62%.
This morning Federal Reserve Chair Jerome Powell gave reassuring inflation testimony before the House Financial Services Committee. Prices would rise this year as Americans are able to go out and spend post-pandemic, but while “We do expect that inflation will move up over the course of this year,” he said. “Our best view is that the effect on inflation will be neither particularly large nor persistent.” As you might expect on that view, the yield on the 10-year U.S. Treasury dropped 5 basis points to 1.64% as of 2 p.m. New York time on Tuesday, March 23. On most days recently a drop in Treasury yields like that would have produced a significant rally in stocks. But not today.
The likelihood is that more nervousness in the financial markets about the Federal Reserve will lead to higher Treasury yields this week. The growing fear is that the Fed is asleep at the switch on inflation and that the central bank is going to be forced to play “inflation catch up” down the road. To a great degree the Fed has brought this problem on itself.
At today’s (March 17) meeting of its Open Market Committee the Federal Reserve held its target interest rate at 0% to 0.25% and continued its commitment to buying $120 billion a month in Treasuries and mortgage-backed assets, as expected. But the central bank’s dot-plot survey showed more slippage on projections of when the Fed will raise interest rates. The majority of the Fed officials polled continued to see no interest rate hikes through 2023. But a larger number than in December–7 out of 18, up from 5–now see the first rate increase coming some time before the end of 2022.
On Wednesday the Federal Reserve will update its projections for GDP growth, inflation, and the timing of any interest rate increase. In December, Fed officials, on the famous (or infamous) dot plot indicated that that central bank officials expected to hold benchmark interest rates in the current 0% to 0.25% range through the end of 2023. in the months since that projection from the Fed the market has been pricing in a different scenario, one that sees a tightening in interest rates from the Fed at the end of 2022. In other words roughly a year earlier than the Fed’s projected schedule last December.
With everything going on, it’s easy to forget about the upcoming meeting of the Federal Reserve’s interest rate setting body, the Open Market Committee, on Wednesday. Which would be a mistake because, in my opinion, nothing is more important than interest rates (and bond yields) for the direction of stocks over the next four months or so. The Fed isn’t expected to announce any change in policy on Wednesday. Benchmark interest rates will stay at 0% to 0.25%. The central bank is almost certain to keep buying $120 billion a month in Treasuries and mortgage-backed securities But this meeting in scheduled to include an update on the Fed’s projections for future inflation and economic growth. Those words have the potential to shift the market ahead of any action.
Headline inflation, as measured by the consumer price index, climbed 0.4% month over month in February the Bureau of Labor Statistics reported today. That puts the year over year increase in headline inflation at 1.7%. Core inflation, which excludes more volatile food and energy prices, was up 0.1% month over month in February. That’s a 1.3% year over year increase in core inflation. Both measures are well below the Federal Reserve’s 2% inflation target.
As of the close in New York today, February 22, the yield on the 10-year Treasury had climbed another 3 basis points to 1.37%. Commodities that can act as inflation hedges were up as well. Copper showed no signs of ending its climb, rising 4.17% today to $8909 a ton on the London Metal Exchange today
Federal Reserve Chair Jerome Powell will testify in front of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday–and do his best not to make any news.
10-year Treasury yield hits 1.30% even as stocks drop with rates hitting peak from before the March 2020 pandemic panic
