Market 04/10: CPI inflation higher than forecast

39 Billion USD 10Y Treasury Bond Auction Fails After Alarming Inflation Data

Bond yields in the market are already high due to inflation data higher than expected. Yet the High Yield in today's 10Y bond auction session was even higher:

High Yield: 4.56% (market yield: 4.529% | previous session: 4.166%)
=> High tail level: 3.1bps!
- Successful bid ratio at High Yield level: 54.10% (much higher than previous session: 31.12%)
Bid-to-cover: 2.34 (sharp drop from previous session: 2.51)
Competitive award components:
- Dealers (dealer): 23.95% (higher than previous session: 17.06%, and higher than average ~16%)
- Foreign bidders: 61.80% (lower than previous session: 64.29%)

High tails, sharp drop in bid-to-cover, up to 54.10% of successful bidders placed bids at the High Yield level and needed more dealers to step in due to weak bidder demand.
=> This is completely a failed auction session - partly due to the negative inflation report early this morning!

10Y bond yields on the market surged even stronger after the auction session (though already high after CPI report):

March CPI higher than expected: Fed may maintain higher-for-longer policy

1. CPI growth higher than forecast: risk of inflation rebounding upward

Headline CPI March +3.5% Y/Y, higher than estimate +3.4% and +3.2% previous month
Core CPI +3.8% Y/Y, same as previous month but higher than estimate +3.7% Y/Y

Monthly growth (m/m):

Headline CPI +0.4% M/M, same as previous month but higher than estimate +0.3%
Core CPI +0.4% M/M, higher than estimate +0.3% and +0.3% of previous month

Core CPI growth over 3 months rises to +4.5% (annualized)

2 - CPI Components: Services rise sharply due to rebound in housing, energy, and food costs

CPI Components Analysis: core services are the main growth driver

While March core goods prices fell -0.7% Y/Y, core services prices rose sharply +5.4% Y/Y

Most sub-items in core services increased, but shelter and transportation prices increased the most

3-month service CPI growth excluding rent also reached 8.7% (annualized)

3. Market pushes back expectations for aggressive Fed rate cuts, global bonds sold off

Market now expects rates to remain “higher for longer” - almost no expectation for Fed rate cuts before September.

US 2-year bond yield rises +16 bps to 4.9%=, highest since November as market expects rates not to cool down yet

Global bonds sold off after hot US inflation data, US 10Y T-bond yield surges to near 4.5%.

If current rates hold until year-end, interest on federal debt will reach 6% of GDP by year-end.
- Public debt will explode (light blue line)

FOMC Minutes: Fed uncertain (uncertainty) about disinflation progress

Key points in March FOMC Minutes:

Most members see rate cuts possible this year (unclear when)
Employment and inflation goals moving toward better balance
Most members support slowing QT (balance sheet runoff) by about half from current pace (-95 billion USD per month)
Especially slowing MBS sales.
Financial conditions may not tighten as expected (credit crunch not strong enough) to curb inflation => may keep inflation elevated.
Geopolitical risks could cause further supply disruptions, fueling inflation.
Disinflation path uneven across months.
Members feel uncertain about inflation returning to 2% target:

Fed officials' statements: Barkin, Goolsbee

Barkin

I think we've made a lot of progress on inflation (?)
AI will develop rapidly and replace some jobs

Goolsbee

Rising Black unemployment rate is a warning sign
This year we have to face more trade-offs than last year.

Crypto market: Bitcoin halving scheduled for 00:14 +UTC on 04/19

Bitcoin halving event scheduled for 00:14 UTC on 04/19

Ethena - tokenized hedge fund rakes in billions in crypto with 37% yield

Q1/2024 earnings update: Delta

Revenue: 13.7 billion USD
EPS GAAP: 0.06 USD
Domestic revenue +3% Y/Y, positive growth trend in Q1
Announced new routes and service improvements, including resumption of service between New York-JFK and Tel-Aviv.