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Market takes current inflation surge in stride despite expectations for an even worse CPI report today
Unemployment claims expected to show a continued improvement in the U.S. labor market
30-year T-bond yield dips to 3-1/4 month low ahead of auction

Market takes current inflation surge in stride despite expectations for an even worse CPI report today — The consensus is for today’s May CPI report to show an increase of +0.4% m/m, down from April’s sharp +0.8% increase. On a year-on-year basis, however, the May CPI is expected to strengthen to +4.7% y/y from April’s +4.2%.

Today’s May core CPI is expected to show an increase of +0.4% m/m, down from April’s sharp increase of +0.9%. On a year-on-year basis, today’s May core CPI is expected to strengthen to +3.5% y/y from April’s +3.0%.

The markets will mostly ignore today’s year-on-year CPI figures because of the distorted base from last year during the pandemic. However, today’s CPI report will still be alarming because inflation has surged in the past several months. On a 3-month annualized basis, the headline CPI in April rose by a striking +7.2%, and the core CPI rose by +5.6%.

Today’s CPI consensus would produce even stronger May CPI figures on a 3-month annualized basis with a +7.4% increase in the headline CPI and a +6.8% increase in the core CPI.

The markets remain relatively relaxed about the current inflation figures because the markets generally concur with the Fed that the current surge in inflation is transitory and is due to temporary factors like the sharp rebound in demand and supply constraints.

The 10-year breakeven inflation expectations rate on Wednesday dropped by -4 bp to a 1-1/2 month low of 2.33%. The breakeven rate is now down sharply by -26 bp from the early-May 8-year high of 2.59%. The decline in the breakeven rate confirms the market’s reduced concern about the inflation situation.

However, there is no surefire way at this point to tell whether the current inflation surge is transitory or will turn into something more persistent. The markets can only wait to see if inflation falls back later this year and early next year as GDP growth cools to a more normal growth rate.

Unemployment claims expected to show a continued improvement in the U.S. labor market — Today’s weekly unemployment claims report is expected to show a continued improvement in the U.S. labor market.

The consensus is for today’s initial unemployment claims report to show a -15,000 decline to 370,000, adding to last week’s -20,000 decline to 385,000. Today’s continuing claims report is expected to show a -121,000 decline to 3.650 million, reversing the majority of last week’s +169,000 increase to 3.771 million.

Initial claims last week fell to a new 15-month low but remain elevated by +169,000 from the pre-pandemic level seen in February 2020. Continuing claims fell to a 14-month low two weeks ago but remain elevated by 2.1 million from the pre-pandemic level.

The U.S. labor market received some good news earlier this week with the report that JOLTS U.S. job openings in April soared by +998,000 jobs to a record high of 9.286 million. Job openings have risen every month so far this year, with a total increase of 2.5 million jobs. Job openings in April were actually 2.1 million jobs higher than the pre-pandemic level of 7.1 million seen in January 2020.

The sharp increase in job openings shows that U.S. job potential is returning. However, filling those jobs is taking longer than expected, with payroll growth running behind expectations in the past several months. May payrolls rose by +559,000, which was much better than April’s disappointing report of +278,000 but weaker than the consensus of +650,000.

The better news on the labor front was that the May unemployment rate fell by -0.2 points to a 14-month low of 5.8%, which showed a stronger labor market better than market expectations for a -0.1 point decline to 6.0%.

30-year T-bond yield dips to 3-1/4 month low ahead of auction — The Treasury today will conclude this week’s $120 billion coupon package by selling $24 billion of 30-year T-bonds. Today’s auction will be the first of two reopenings of the 2-3/8% 30-year bond of May 2051 that the Treasury first sold in May.

The 30-year T-note yield on Wednesday fell to a new 3-1/4 month low of 2.15% and closed the day down -5 bp at 2.17%. The 30-year bond yield is now down by -36 bp from March’s 1-3/4 year high of 2.51%. The 30-year bond yield has fallen, along with the rest of the longer-term Treasury curve, due to lower inflation expectations and reduced fears about the timing of the Fed’s first rate hike.

The 12-auction averages for the 30-year are as follows: 2.33 bid cover ratio, $6 million in non-competitive bids, 5.9 bp tail to the median yield, 73.4 bp tail to the low yield, and 52% taken at the high yield. The 30-year is moderately above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.1% of the last twelve 30-year T-bond auctions, which is well above the median of 60.5% for all recent Treasury coupon auctions.

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