It’s a cloudy day for the bond market, with mortgage bonds down 25 basis points and the 10-year treasury yield hovering around 350. But let’s not lose hope just yet. We have some critical inflation numbers coming up this week, on Wednesday, May 10th, which could signal the start of some improvement in inflation.
However, I must admit there are a few changes and potential headwinds to be aware of. For starters, the Bureau of Labor Statistics revised the number for April 2022 lower, meaning a lower chance for year-over-year inflation improvement. Then, we saw an unexpected spike in oil prices in April due to OPEC Plus’ production cut. This temporary spike will be reflected in the April Consumer Price Index (CPI), leading to higher inflation estimates.
Let’s look at some numbers together. Goldman Sachs and JP Morgan predict a half percent monthly inflation, mainly due to the oil price spike. However, the market consensus leans towards 4/10 of a percent, which coincides with last April’s figure, indicating that year-over-year inflation could increase slightly from 5% to 5.1%.
For the core inflation, predictions range from a slight drop to no change, affected by higher costs in used cars, apparel, and car insurance. However, the shelter cost added less inflationary pressure last month, which could continue to be the case.
Moreover, the BLS revised numbers for June and July remain the same, with higher inflation and shelter costs, which could work in our favor towards the end of the year. So while we may need more patience, the situation is more delayed than canceled.
This week also brings the Producer Price Index (PPI) and auctions for the 10-year treasury note and 30-year bond, which could influence the bond market.
Despite our initial expectations for May 10th being a turning point for inflation improvement, unforeseen factors like OPEC’s production cut and CPI revisions have caused a slight delay. However, we still expect to see progress, albeit slower.
