Friday's Market Minute: Bond Market Shrugs Off Hot CPI Report

U.S. stocks rallied to a fresh intraday record high yesterday after investors realized the punchbowl of stimulus is not going away anytime soon. U.S. inflation outperformed, and the market measured the hot CPI print as transitory in nature. Consumer prices surged 5% year-over-year in May as the reopening of the economy accelerates.

Core inflation, which excludes food and energy prices, rose from 3.0% to 3.8%, the largest increase in nearly three decades. The index for used cars and trucks continued to rise sharply, increasing 7.3% in May. After breaking down the numbers, the used car index continues to account for a good chunk of those gains but will normalize once the chip shortage problem is rectified.

From an investing angle, the inflation playbook heading into the summer is holding up nicely because it appears Wall Street saw the writing on the wall that pricing pressures were going to surge. The stronger-than-expected inflation report initially sent the 10-year Treasury back above the 1.50% level. However, as investors digested the numbers, an initial increase in Treasury yields lasted little more than an hour. By the end of the trading day, interest rates extended recent weekly declines as the 10-year yield fell below the psychological 1.50% level.

The is no doubt that the U.S. stock market continues to benefit from improving economic data, potentially transitory inflation, and no apparent near-term end in sight for stimulus as the Federal Reserve’s balance sheet topped $8 trillion for the first time. Corporate credit markets appear unphased as the Fed sold around $160 million of its corporate debt holdings since Monday. Last week’s announcement would unwind its nearly $14 billion corporate credit portfolio. Overall, with the long-term consumer demand outlook still firm, a slight decline in inflation expectations as signaled by the bond market gives the Fed room to keep policy easier for longer.

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