Ride
“Ride,” a song by Twenty-One Pilots, the Columbus, Ohio-based band, addresses some common struggles of life and points to the benefits of going with the flow in the face of such challenges. This is just the kind of advice that might work well in the current economic landscape.
Consider: The Consumer Price Index rose 3.8% from a year earlier, according to the Bureau of Labor Statistics. The increase was the most since 2023, with a monthly advance of 0.6% in April for the headline number and 0.4% for the core (Figure 1). The energy index, no surprise, contributed greatly to the bump; thankfully, the core index, which strips the volatile energy number out, rose only modestly after years of tepid improvement. Perhaps Twenty-One Pilots was referring to the glacial decline in core inflationary pressures when they sang: “I’m fallin’, so I’m takin’ my time on my ride.”
The ongoing conflict in the Middle East has dominated headlines in recent months, and energy prices have been a big focal point of the story. Gas prices in the U.S. rose by almost 28% over the past two months, according to the BLS. Similarly, the daily national average price of unleaded exceeded $4.50, nearing the all-time high set in the summer of 2022, according to the American Automobile Association (Figure 2).
The CPI report also noted that grocery prices, rents, and airfares saw large increases from a month earlier. The moves for gasoline and airfares were fairly predictable, but the April jump in rent was unexpected—and, our analysis shows, more of a one-off event due to data distortions from the government shutdown.
Unlike most CPI categories, shelter inflation was not fully “caught up” after the government shutdown last fall because rent and owners’ equivalent rent are measured on a six-month property rotation. Without the BLS quirk on rents, core CPI would have printed 0.26% for April, instead of 0.4%, according to Bloomberg Economics. Yet once the data-tarnished housing sector is solved for, core inflation seems to be in check. Furthermore, tariff-exposed goods were flat, while some discretionary spending categories, like furniture/bedding, tools/hardware, and window coverings, are actually declining (Figure 3).
The data do not yet seem to be weak enough, though, to sway officials at the Federal Reserve. For example, Susan Collins, President of the Boston Fed, said that interest rates should remain on hold for “some time,” adding that “more than five years of above-target inflation has reduced my patience for ‘looking through’ another supply shock.”
Similarly, Austan Goolsbee, President of the Chicago Fed, said: “I don’t see how you can look at the current situation and … view that the only thing that’s on the table conceivably are rate cuts.” He highlighted ancillary components of inflation that are not energy, such as services, as a warning to policymakers that the underlying economy is overheating. “Inflation, which we thought was under control, is reaccelerating, and that’s a real problem,” said Gus Faucher, chief economist at PNC Financial Services Group. “The longer inflation remains elevated, the more stress that’s going to place on consumers.”
In the debate over whether the Fed’s next move will be a cut or a hike, federal funds futures now imply a modest move higher by April 2027. Figure 4 compares the rate implied by the April 2027 contract with the current target range of 3.50% to 3.75%. The implied rate sits slightly above that range, suggesting that markets are pricing in some probability of a hike.
The price action in the bond market is very interesting, too. The belly and long end of the curve rose in yields last week, with the 10-year Treasury increasing by 23 basis points (bps), while the two-year Treasury was up by 19 bps. However, short-term rates—such as overnight repo, secured overnight financing rate, or summer fed funds futures contracts—were largely unchanged. That the yield curve bear steepened (the 10-year Treasury rose more than the two-year Treasury) reflects a greater fear of growth/inflationary pressures, instead of bets on future accommodative monetary policy. (Recall that the yield curve tends to steepen during easing cycles and flatten during tightening cycles.)
The bottom line: Today’s market is in a period of high uncertainty, while the economy at large is at a fork in the road, and the Fed may be shifting toward less accommodative policy. Buckle up for the ride.
FROM THE DESK
Agency CMBS — Last week was understandably light in new origination, due to the rise in rates. Spreads were broadly biased wider, as investors took a somewhat cautionary stance.
Municipals — AAA tax-exempt yields were higher throughout the yield curve, week over week. Primary new issuance continued to come at elevated levels. We saw the front end of the yield curve under pressure, which follows the same theme from recent weeks. Short-term, cash-collateralized deals saw spreads widen relative to the prior week. Investors put $1.3 billion into funds last week, while high-yield funds saw $218 million of those inflows.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
