Bond yields adjusted higher last week in anticipation of a rate hike by the Fed this week. Friday’s report on the May Consumer Price Index (CPI) was higher than expected (+1.0% vs +0.7%).
That took the year-over-year increase to +8.6%, which is a 40-year high. Before Friday’s report, the futures on the Fed’s rate hike for this week was a 92% probability of a 50 basis point hike. As of this writing, the futures have moved down to a 72% probability for 50 basis points and a 28% probability of a 75 basis point hike. This sent equities into a tailspin on Friday.
The fact is that the economic data is pointing toward recession. The cracks in the economic picture are widening as the data continues to pour in.
Last week, retailers sounded the alarm that inventories are building. Walmart and Target showed year-over-year increases in inventory of +32% and +43%, respectively. Consumers are feeling the crunch of higher inflation and lower real wage growth. This is leading to changes in consumer spending habits.
Other economic data last week was equally disappointing. Consumer Credit was higher
than expected and has risen considerably over the past few months as consumers are putting more purchases on credit. The preliminary reading on June Consumer Sentiment by the University of Michigan took a tumble. Both Initial Weekly Jobless Claims and Continued Claims were higher than expected. Lastly, Mortgage Applications dropped for the 11th time in the last 13 weeks.
The Fed is likely to hike rates by 50 basis points this week, but the markets are on edge with Friday's CPI print. The May report for the Producer Price Index is expected to show an increase on Tuesday before the Wednesday rate hike decision. This week will also be busy with more economic data to digest in housing and manufacturing data. Expect markets to be uneasy this week as it parses the Fed’s language following the rate decision.