The Subject of Inflation Profile and Yield Curve

Inflation details… In the US, consumer price index increased by 1.3% MoM in June (May: +1%). Price pressure was widespread on the basis of goods and services, and the 11.2% increase in gasoline prices was the general driver of inflation. Transport rose 3.8% month on month and food 1%. Services inflation rose to 0.9%.

This marks an annual CPI inflation rate of 9.1% in June (May: +8.6%), the biggest 12-month increase since November 1981, and exceeding the consensus estimate of 8.8%. Core CPI inflation fell to 5.9% YoY (May: 6%), but still above the 5.7% forecast.

Yield curve… While UST yields are rising in inflation data, yield curve inversion has deepened. The 2Y UST yield, most responsive to monetary policy changes, rose to 3.22% as higher-than-expected CPI pressure bolstered expectations for a 75 basis point Fed rate hike at the end of this month. The 10Y UST yield is at 2.98%. The gap between the 2Y and 10Y UST yield, an indicator of recession, has reached its largest level since 2000 and widened to 22bps.

CPI and US 2-10 year spread comparison… Source: Bloomberg

Conclusion? While Fed members maintain their supportive stances on tightening, the incoming data seems to increase the strength of the hawk camp at the July FOMC meeting. Therefore, we can say that there is an increasing tightening pressure on the Fed. Swap markets are now showing that the likely outcome of this month’s FOMC meeting could be a transition between a 75 basis point rate hike and an even larger 100 basis point increase.

Kaynak: Tera Yatırım
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