Despite bad news, Treasury markets seem unmoved by the latest report
After Thursday’s Core PCE report from February was released, most economists knew that the real story about the current inflation picture wouldn’t be known until the March data was released.
The first piece of that March data was released on Friday, as the US Bureau of Labor Statistics released its Consumer Price Index (CPI). In total, consumer prices spiked in March, jumping 0.9% to 3.3% from February’s 2.4%.
Energy costs were the biggest driver of the increase in the figure, which is a year-over-year price comparison. The energy index increased 10.9% in March, led by a 21.2% increase in gasoline. That accounted for nearly 75% of the monthly all-items increase.
The energy increase was the largest since September 2005. The 21.2% increase in gasoline was the largest monthly increase since the series was first published in 1967. In addition, fuel oil increased 30.7%, the largest monthly increase since February 2000.
If you remove food and energy, the month-over-month increase was just 0.2% to 2.6%. Shelter costs increased 0.3% from February, bringing the annual increase to 3.0%.
Will the increase be temporary?
In the immediate aftermath of the CPI report, the Treasury markets were up slightly. The 10-year Treasury, as of 9:15 a.m. on Friday, was up less than one basis point. Stock futures were largely unchanged just before market opening.
This could be a sign that the markets have expected these numbers all along and have been pricing in these increases as they go.
All eyes will turn to the Federal Reserve to see how they perceive the numbers. In an exclusive interview with Reuters on Friday, San Francisco Federal Reserve president Mary Daly said she thought the economy was fundamentally solid. However, the oil shock was something they would need to keep an eye on.
“We had work to do before we had the oil price shock,” Daly told Reuters. “With the oil price shock, the work just takes longer. No one's really sure how long that will last. (Oil shocks) push up inflation if they persist, and they will tug at growth, and what we would have to do as policymakers is balance those risks and make the best decision to get to both of our goals as quickly and easily as we can.”
Daly was unsurprised by the high CPI numbers and is hopeful that the tenuous ceasefire can lead to a lasting peace, which could bring oil prices back down.
“I think this is already showing through to the economy, and a higher CPI number will not be a surprise to anyone,” she said. “The new news is that it looks like the conflict could stabilize, and that the shipping lanes can open, and that we can start to return to something that looks more reasonable for people. But, you know, that's the uncertain piece.”
Fed likely to wait and see
All of this uncertainty is likely to keep the Fed on the sidelines in the near future. Until there is a lasting peace in the Middle East and oil supply returns to its pre-war levels, the central bank will be wary that any cut could lead to higher inflation.
CME FedWatch, which uses the 30-day Fed Funds rate to predict future moves by the Federal Reserve, favors a rate hold into 2027. There is some uncertainty there as Kevin Warsh, if confirmed, will take over for Jerome Powell as Fed chair this summer. He will be tasked by the Trump administration to lower rates, so it will be his job to build a coalition on the Fed for that cause.
Sam Williamson, senior economist at First American, concurs with FedWatch that the central bank will continue to wait to see how things play out.
“Recent geopolitical developments are unlikely to push the Fed out of its current holding pattern at this month’s meeting,” Williamson told Mortgage Professional America. “However, a clearer path toward conflict resolution could reduce uncertainty and lower the risk that energy price volatility complicates the inflation outlook. For now, the Fed remains in wait-and-see mode, with the timing of future cuts still driven primarily by core inflation and labor market trends.”
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