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Here We Go – Monthly CPI

Well here we go once again – time for a new monthly release of inflation numbers–markets will likely react very strongly–one way or another. Actually strong reactions already started as investors ‘bailed’ on stocks in the final 2 hours of trading as the S&P500 closed 1% lower after being near break even most of the day–the fear of an ugly high consumer price index release is considerable.

Tomorrow the consensus forecast is for the CPI to be at 8.8% year over year versus last months 8.6%. Core CPI is forecast at 5.7% versus 6.00% a year ago. Core month over month is forecast at .6% flat from May.

Almost without a doubt there will be some numbers that are ‘off the mark’. If inflation is running as hot as expected (or hotter) the Fed has another arrow in the quiver for a 75 basis point increase in Fed Funds later this month. The strong jobs report last week was the 1st arrow and inflation will likely be the 2nd arrow for the July 75 basis point hike–and these 2 will be adequate to cement the rate increase.

The bond market is still trumpeting ‘recession’ as the 10 year treasury yield rose to as high as 3.10% last week after the release of the jobs numbers, but has fell back to as low as 2.90% today, before closing at 2.96%.

So tomorrow will we see the 10 year yield at 2.80%? Or will we see 3.20%? I have no clue, but will be watching closely to see how preferreds and baby bonds react because I still have plenty of dry powder available for investment.

17 thoughts on “Here We Go – Monthly CPI”

  1. The last time inflation (CPI) printed at 9.1% was November 1981, 41 years ago. The fed funds rate was 12%+ then versus today it is 1.58%, so the Fed has a ways to go.

    Rob Arnott’s paper I posted about last week appears to be spot on. He forecasted CPI would print @ 10.0% this cycle. Made a believe out of me, but every investor gets to vote via their portfolio allocation.

    BTW, if you were not an investor in the lead up to November 1981, count yourself lucky. It was a terrible, horrible, no good time from ~ 1966 to 1982. Not many investors still around that were retired and suffering back then.

  2. Markets don’t seem to be impressed by this CPI, as apparently it was already baked in. On the contrary, they seem happy as of right now, both the indexes and our preferreds.
    Interesting to see how they will react after the next 75 bp increase. Is that already baked in too?

    1. 18 month CDs are at 3. Year end 2022 Treasuries at 2.63.

      3.64 for 5 years is not that attractive if you ask me. But the highest I see is 3.55 on 5…….so maybe. Want see 1 + hurting rates

  3. Also waiting for longer term CD or solid bonds to approach higher rates but meanwhile these are available as New Issues on Fidelity.

    3.750 MONTHLY
    maturity = 07/20/2023
    avail = UNTIL MON, 07/18 @ 11:30 A.M. ET

    4.000 QUARTERLY Step-up Call Protect
    maturity = 01/16/2024
    avail =UNTIL WED., 07/13 @ 11:30 A.M. ET

  4. Following up on Danny’s comment at what point do Fixed Income Investors grab what’s out there in terms of CDs, US Treasuries, Corporate Bonds, GICs in Canada etc?
    I’ve been holding out for brokered 4% non-callable 5 year CDs which I’m hoping will emerge in mid August. In Canada we already have 4.5% GICs and except for one 7 year US Treasury that had a coupon of 3.25% I have not seen much action there. IG Corporate bonds have already passed my 4% threshold with reasonable durations.
    When this global interest rate hiking process snaps back into reverse I think the window of opportunity will be lost again for years.
    So is that August, September, November, January 2023 or none of the above? I’m much more interested in the consensus here then the Talking Heads on mass media.

    1. “Following up on Danny’s comment at what point do Fixed Income Investors grab what’s out there in terms of CDs, US Treasuries, Corporate Bonds, GICs…?”

      “When this global interest rate hiking process snaps back into reverse I think the window of opportunity will be lost again for years.”

      Exactly fxxxing (edited by Tim M) right!! This mirrors what I am thinking right now myself.

    2. Richard,
      Its a very hard call. Im at about 30% cash and eager to deploy. Forcing myself to at least wait until after next 75 rate hike, but boy there are IG Corp Bond deals out there that I would have given up Gin & Tonics for a year ago. Starting to look further out too at 10-20 year maturities.
      Overall I agree that this maybe an opportunity that starts slipping away by the end of the year. thinking Aug/Sept/Oct maybe the sweet spot.
      Hey, at least we are up to nearly 1.5% in MM and HY savings..
      And part of me thinks its still better to hang out in that for a while longer rather than locking in something else for an extra 2% for next 2/3 yrs

      1. Adrian: Yep, that was the big conundrum back in 1980. Do I lock in 12% on a 30 year T bond or wait until they go to 15% ? Or should I go short with a 1 year T bill at 14% while I wait ? Now we have the inflation, but nowhere near anything safe or FDIC insured to at least match it. We have had near zero interest rates for so long that now a 2 year 3% CD looks good, which means you will only lose about 6% of your money if you buy one. Sad, very sad.

      2. Hi Adrian….I’m at 20% cash and am more interested in redeploying into higher yielding cash investments then deploying into equities or most anything outside of Fixed Income.
        In terms of duration I don’t want to be in the Market at all struggling with investments that are being Called early between 2023 and 2026, My time frame for investments is 2027 through 2032 which I’m hoping will get me past the ups and downs of Fed policy and back into a stable economy and pretty much past the next presidential election.
        As far IG Corporate Grade Bonds, I totally agree, a typical search for a 4% coupon with a 2027-2035 maturity and “Call Make Whole” at or under par returns about 400 choices so I’m not sure about going out more then 10-12 years. Of course it depends on your age.
        For me, while I’m 20% cash, I’m 44% Corporate Bonds, Treasuries and GSEs, and 28% IG Preferreds and Canadian Rate Reset Preferred shares. I have a very small equity exposure, all Blue Chip dividend payers. Mostly the Big five Canadian Banks. At times like this I feel particularly good about that small allocation.

    3. CD rates sometimes lag interest rates by a short amount of time, The best CDs I bought were when the market just started turning downward and I grabbed the current rate before it vanished. But that was years ago at 5-7%, not my game now.

    4. Treasury direct has 3 month bills 2.4%, 6 month 2.90%. My plan is to pick one of these after the July fed meeting. Then just roll them over until the fed cries uncle and starts lowering/QEing again. At that point I’ll pick something longer term and stick with it for a few years.

      We’ll see how it goes.

      1. Harrold been working on this very “plan” since the spring. picked up 20m for my wife and 25000 for my mother yesterday thru Edward Jones 2.978 % ytm 1 year. Will ad further after next rate hike.

        1. They have the Funds hike plan in order and rolling. Im curious to see if they have the nerve to follow through on the QT end, and see if they have any desire to right size the yield curve.

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