So inflation reaccelerated a bit last month despite the latest rate hike and the Fed’s promises to keep tightening. But believe it or not, today’s number didn’t actually change the map for big money investors.
Yesterday, the rate futures market was split 3-1 on whether the Fed would raise rates 0.25 percentage point in three weeks or a more aggressive 0.50 point. Those odds did not budge even a fraction after the PCE came in hot.
PCE was a non-event in the rate market. The real pivot point was two weeks ago, when consumer inflation also came in hotter than expected and forced futures traders to accept the fact that a big rate was a real possibility . . . and a pause was off the table.
Everything after that has been confirmation that the initial inflation signal was no isolated fluke. The Fed doesn’t have any room to be lenient. Anyone who hoped otherwise was wrong.
And as a result, we all simply need to endure the current interest rate environment for a little longer. At this point, everyone reading this knows that the economy can not only survive the highest rates in over a decade but even laugh them off.
The only question is how long the laughter can continue before it turns into tears. But the rate market is telling us that the amount of pressure isn’t likely to increase beyond our previous expectations . . . even after this morning’s “shock” numbers.
A month ago, it was about 50-50 that the Fed would stop by July after lifting the overnight rate to around 5.25%. That consensus has not changed.
After the CPI report, a very vocal minority is now betting that we’ll see another 0.25 point hike in the fall. This morning’s report made a few of them reach a little higher . . . but on the whole, the curve looks just like it did a week ago.
Let that sink in. This morning’s numbers did not move the map or make a recession any more inevitable. Who’s telling you that they did? What’s their evidence?
And if the big money in the futures market isn’t compelling enough, just look at the bond market. Yields across the curve edged up today . . . but none more than 2%.
One-month paper actually paid higher interest a month ago, which suggests that the odds of a bigger-than-anticipated hike in the next 30 days are at worst where they were before the February Fed meeting.
Likewise, while yields are getting a little hotter in the 4-12 month zone, 6- and 12-month paper paid more a few days ago than they do today. There’s no capital flight at this end of the market that would argue for the Fed continuing the tightening cycle into next year or even beyond the summer.
One way or another, we’ll have clarity in the next few months. And then we’ll start being able to look for relief.