Out of the plethora of worries investors have this year, inflation is arguably at the top of the list. Heading into today, investors had hoped that their inflation worries might ease following the release of consumer price data for April from the Bureau of Labor Statistics.
Unfortunately, the data did little to quell investors’ anxieties about rising price pressures. According to the BLS, the CPI grew by 0.3% month–over-month in April, faster than the 0.2% increase that economists were expecting. The core CPI, which strips out food and energy prices, grew by 0.6%, outpacing the expected 0.4% increase.
On the positive side, the data provided some support to the idea that inflation may have peaked. April’s year-over-year gains in the headline CPI and the core CPI were 8.3% and 6.2%, respectively, down from 8.5% and 6.5%, respectively, in March.
Still, both those figures are much too high to give either the Fed or investors comfort, and will do little to dissuade the central bank from hiking rates rapidly in the coming months.
Particularly concerning was the 0.5% month-over-month increase in shelter prices, the third straight month they’ve increased by that much. Meanwhile, airline fares surged by 18.6% in just one month, the largest increase since at least 1963, per the BLS.
These latest inflation figures will keep pressure on the Fed to tighten monetary policy aggressively throughout the rest of the year. Interestingly though, the early reaction in markets to the data has been relatively muted.
As of this writing, the two-year Treasury yield is up a modest 3 basis points to 2.65%, while the 10-year yield is down 5 basis points to 2.93%.
Fed funds futures show little change in the market’s expectations for rate hikes, with the central bank anticipated to raise rates by another 200 basis points by December, bringing its benchmark up to around 2.75%.
Five-year breakevens, a market measure of inflation over the next five years, are up 7 basis points to 3%, but well below their 3.73% peak from March.
The iShares Core U.S. Aggregate Bond ETF (AGG), the largest U.S.-listed bond ETF, is up 0.3% on the day, slightly paring its year-to-date losses to 9.5%.
In terms of equities, the SPDR S&P 500 ETF Trust (SPY) was last trading close to unchanged on the session, keeping its year-to-date loss at around 16%. The tech-heavy Invesco QQQ Trust (QQQ) is down about 1% on the session and 25% since the start of the year.
Investors are closely watching to see whether the S&P 500 falls more than 20% below its all-time highs, which, to some, signals the start of a bear market.
Follow Sumit on Twitter @sumitroy2