Inflation jumps

Due to a small range of factors

Chart of the Day

The key news yesterday was the sharp rise in US inflation to 4.2% in April, with core inflation rising to 3.0%. Both increases were much larger than economists expected. There is still lots of debate around whether this is just a larger “transitory” rise in inflation than expected or a sign of something more sustained. In the transitory camp, the jump was mainly due to the prices of a small number of items rising sharply, like used cars. This shows item-specific factors are at play, rather than factors lifting inflation across the board. But we are only one month into the high inflation period, so those inflationary pressures could become more broad-based.

Macro

Across the main categories, inflation ranged from 1.2% for food at home to 25.1% for energy in April.

The Cleveland Fed measures take out items with extreme price moves, and rose by much less than the total measure, showing how a few item-specific factors were at play.

Markets

US yields rose as a result of the high inflation print. The US 10-year yield has risen by 11 bp in the past week, the 5-year has risen by 6 bp and the 30-year has risen by 16 bp - yields are still lower than they were earlier this year though.

The 10-year inflation breakeven rate barely rose, and it was instead real yields that increased.

Fed Funds futures have priced in a lower rate path over the past week despite higher inflation.

The equity markets reacting very badly due to the still relatively small rises in yields, not a good sign for future Fed tightening.

The VVIX could be a sign traders are still worried about further increases in VIX to come.

The jump in inflation reversed some of the recent weakness of the USD.

Cryptos fell sharply after Elon Musk said Tesla would no long accept bitcoin for payment, due to concerns about the environmental impact of mining the currency.

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