{"id":191045,"date":"2023-05-26T12:30:00","date_gmt":"2023-05-26T16:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=191045"},"modified":"2023-05-26T12:58:47","modified_gmt":"2023-05-26T16:58:47","slug":"inflation-drifts-further-from-the-feds-target-may-26-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/inflation-drifts-further-from-the-feds-target-may-26-2023\/","title":{"rendered":"Inflation Drifts Further from The Fed\u2019s Target: May 26, 2023"},"content":{"rendered":"\n

Equities are responding in stride this morning on optimism concerning the debt ceiling as warnings from credit rating agencies successfully generate urgency in Washington. Both sides of the political aisle have commented that meaningful progress has been made with a deal possibly completed in the next few days against the backdrop of an identified deadline of June 1. Meanwhile, today\u2019s economic data was scorching, with the Federal Reserve\u2019s (Fed) preferred measure of inflation going the other way on both a month-over-month (m\/m) and year-over-year (y\/y) basis. In fact, odds of another interest rate hike in June have risen from the ashes and is now the most likely outcome with market players raising wagers consistent with a 53% probability of another 25-basis point (bp) hike at the June 14th<\/sup> meeting.<\/p>\n\n\n\n

Members of Congress and the White House appear close to securing a deal on the debt ceiling with probable concessions made on both sides. Top Republican Congressional representative Patrick McHenry of North Carolina however, has implied that the final aspects of the deal are likely to be the most challenging, with sensitive issues that have yet to be reconciled. Meanwhile, top Democrats including Hakeem Jeffries of New York and Steven Horsfod of Nevada have pushed back against a deal that in their view sells out the American people by mandating work requirements to claim certain benefits and by reducing the budget for tax enforcement. And while House conservatives are furious that Speaker Kevin McCarthy of California is making concessions to try and get a deal done, the Speaker has remarked that everyone is unlikely to be satisfied at the end of the day, with hardliners on both sides upset about concessions. The Speaker however, promised to be loyal to the rule that provides members of Congress 72 hours to review the bill, giving negotiators a short window from today to this Thursday\u2019s June 1 deadline. With the far-left of the Democrats and the far-right of the Republicans likely to be upset about the agreement, it\u2019s unclear if a deal can even pass both chambers.<\/p>\n\n\n\n

The economic front was certainly eventful this morning as well, with the 8:30 am Personal Income and Outlays report from the U.S. Bureau of Economic Analysis showing robust consumer spending during April and accelerating inflation. Consumption was on fire, jumping a whopping 0.8% m\/m, trouncing expectations calling for 0.4% and recovering from March\u2019s 0.1% rate of growth. Strong consumers didn\u2019t thrive without fueling inflationary pressures however, with the Fed\u2019s preferred inflation measure, the Core Personal Consumption Expenditures (PCE) Price Index rising 0.4% m\/m and 4.7% y\/y, accelerating from the previous month\u2019s 0.3% and 4.6%. Including food and energy (non-core), PCE inflation came in at 0.4% m\/m and 4.4% y\/y, also accelerating from the previous month\u2019s 0.3% and 4.2%.<\/p>\n\n\n\n

\"inflation<\/figure>\n\n\n\n

Markets are choosing the glass half-full perspective following yesterday\u2019s robust rally, and are focusing their attention on debt ceiling progress rather than fiery inflation pressures. The tech-heavy Nasdaq Composite Index is leading the way this morning, up 2% while all other major indexes are jumping higher by about 1%. Bond yields are jumping higher for the most part as well, due to expectations of a tighter Fed and rising inflation. The 2-year and 10-year Treasury yields are up 10 bps and 2 bps to 4.61% and 3.83%. The shortest-end is seeing some relief on debt ceiling progress but not consistent with the optimism in the equity market. The 1-month Treasury yield still trades at a lofty premium of 5.6%, its down 10 bps this morning. The dollar is continuing its run, up 9 bps to 104.34 with currency traders facing the high probability that the Fed will remain in the spotlight. WTI crude oil is up 1% recovering some of yesterday\u2019s battering as players try to figure out the supply situation at the next OPEC + meeting on June 4. The meeting comes at a time of confusion for traders following bullish comments from Riyadh weighed against bearish comments from Moscow.<\/p>\n\n\n\n

Recent earnings reports reflect consumers struggling with inflation while banks ratchet up provisions for loan losses as the economy slows and delinquencies tick up: <\/p>\n\n\n\n