- U.S. headline CPI is expected to see big increase but core CPI is expected to remain subdued
- Bullard loosely ties Fed tightening to 75-80% vaccination level
- 30-year T-bond auction
U.S. headline CPI is expected to see big increase but core CPI is expected to remain subdued — The consensus is for today’s March CPI to show a large gain of +0.5% m/m, adding to the +0.4% m/m increase seen in February. The large increase in the month-on-month CPI is expected to stem mainly from a 16 cent per gallon rise in regular gasoline prices seen in the first half of March from $2.72 to $2.88 per gallon.
On a year-on-year basis, today’s March CPI is expected to jump to +2.5% y/y from Feb’s +1.7%. The big increase in the year-on-year figure will be due mainly to the base effect caused by the sharp drop in the CPI last year due to the pandemic shutdowns.
Today’s March core CPI is expected to be better behaved with a modest 0.2% m/m increase, adding to Feb’s +0.1% m/m increase. On a year-on-year basis, today’s March core CPI is expected to rise to +1.5% y/y from Feb’s +1.3%, which would still be below the Fed’s +2.0% inflation target.
The markets are already expecting to see a significant increase in the inflation statistics starting in March due to the year-earlier base effect. Due to that distortion, the markets will be focusing more on the shorter-term inflation statistics to gauge what inflation is doing. In that regard, however, the CPI in February rose by a hefty +3.5% on a 3-month annualized basis, mainly because of higher energy prices. Still, the Feb core CPI rose by only +0.7% on a 3-month annualized basis, illustrating that there isn’t currently any major upside breakout in core inflation.
Yet, the markets remain nervous about a stronger inflation outlook due to the massive amount of fiscal stimulus in the economy and the consensus for a surge in GDP growth of +8.1% in Q2 and +7.0% in Q3. The markets are currently pegging the 10-year inflation rate at 2.34%, according to the 10-year breakeven rate, which is well above the Fed’s 2.0% target.
Bullard loosely ties Fed tightening to 75-80% vaccination level — St. Louis Fed President Bullard on Monday made an interesting statement by loosely connecting Fed tightening to a 75-80% vaccination level. Mr. Bullard said, “It’s too early to talk about changing monetary policy. We want to stay with our very easy monetary policy while we are still in the pandemic tunnel. If we get to the end of the tunnel, it will be time to start assessing where we want to go next.”
He added, “When you start to get to 75% vaccinated, 80% vaccinated and the CDC starts to give more hopeful messages that we are bringing this under better control and starts relaxing some of their guidelines, then I think the whole economy will gain confidence from that.”
The CDC’s Covid Data Tracker reports that only 22.3% of the U.S. population has been fully vaccinated, which is far below Mr. Bullard’s benchmark of a 75-80% vaccination level. Based on the current vaccination rate, Bloomberg estimates that the 75% vaccination target should be hit by around August 9, which is still another four months away.
Still, that suggests that according to Mr. Bullard’s benchmark, the Fed by this autumn will be looking at the tail end of the pandemic and will start thinking about when it might start pulling back a bit on its monetary largesse.
The market consensus is that the Fed will not implement its first rate hike until late 2022 or early 2023. The Eurodollar futures market indicates that the Fed is expecting two or three +25 bp rate hikes in 2023, two rate hikes in 2024, and then about one rate hike per year in 2025 through 2027. That would leave the funds rate up by a total of +250 bp by mid-2028 at around 2.75%. That would be mildly above the FOMC’s current projection of a longer-run fed funds target of 2.5%.
This is a heavy week for Fedspeak with appearances by various Fed officials, including by Fed Chair Powell on Wednesday at a Q&A hosted by the Economic Club of Washington. Fed Chair Powell in recent appearances has taken pains to appear dovish. In a virtual appearance at an IMF event last Thursday, Mr. Powell reiterated the Fed’s theme that U.S. economy is far from a full recovery and that it is too early to be thinking about tapering QE. Mr. Powell said, “the recovery here remains uneven and incomplete,” and that disparate efforts to vaccinate people globally are a risk for the economic rebound.
30-year T-bond auction — The Treasury today will wrap up this week’s auction package by selling $24 billion of 30-year T-bonds. Today’s auction will be the second and final reopening of the 1-7/8% 30-year bond of February 2051 that the Treasury first sold in February. The Treasury’s sale on Monday of 3-year and 10-year T-notes saw solid demand, which provided some confidence for today’s 30-year T-bond auction.
The 30-year T-bond yield has been trading sideways over the past week and closed slightly higher at 2.33% on Monday. The 30-year T-bond yield is comfortably below its 1-3/4 year high of 2.51% posted in mid-March.
The 12-auction averages for the 30-year are as follows: 2.32 bid cover ratio, $6 million in non-competitive bids, 5.8 bp tail to the median yield, 80.6 bp tail to the low yield, and 52% taken at the high yield. The 30-year is popular among foreign investors and central banks. Indirect bidders have taken an average of 64.0% of the last twelve 30-year bond auctions, well above the median of 6.1.1% for all recent coupon auctions.
