May 12, 2021
Inflation: Some of today’s big upside CPI print can be attributed to base effects, meaning the magnitude will likely prove transitory, but pricing pressures look like they’ll persist. The index for used cars and trucks increased 10.0% during the month (biggest monthly increase since the series began in 1953), which deserves an asterisk based on production constraints for new autos, but an increase of that magnitude wouldn’t occur without sufficient demand. The test for the Fed’s transitory call on inflation comes when comparing Q3 inflation data to Q2 reports, which suggests the Fed is still unlikely to address the tapering of asset purchases at the June meeting. The Jackson Hole conference in August is probably the right timing and the right venue (where they rolled out ‘average inflation targeting’ last year) to discuss tapering.
Bond yields: Ten-year bond yields at 1.6916% are currently testing the upper bound of our resistance range. Tactically, bond yields reversed when they crossed through 1.57% on Friday and could release higher once through 1.69% with an eye on ~1.90%.