Seven thoughts going into today's US CPI

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Today’s US CPI number will determine whether the Fed hikes or pauses in its May meeting. The market is currently pricing in a 66% probability of a 25 bp hike to 5.00%. If the CPI number undershoots significantly, I can see those odds of a hike getting cut to below 50% and more cuts getting priced further out in the curve. A higher than expected number would send the odds of a hike closer to 80%.

A few thoughts going into today’s CPI number, in no order of importance:

1. CPI upside/downside surprises have been getting less frequent since last November. Either the street is getting better at predicting CPI, or the volatility of CPI is compressing.

   

   Source: MNI

2. Last week we saw 2 yr Treasury yields sell off on back-to-back weak data in the JOLTS report, US ISM manufacturing, US ISM services, and jobless claims. Yet yields rallied right back up on Friday on an employment number that was in line with expectations and are now back where they were before the string of weak data came out. Based on that price action, one could argue that the bond market has already positioned for a stronger than expected number. The market might be looking at higher Manheim used car sales prices as a reason for people to be expecting a strong number today.

2 yr Treasury yields, 1 hr chart