The Daily Update: US CPI / 10-Year Humdinger

Figures released yesterday showed that the US Consumer Price Index (CPI) edged higher at +0.5% in July, in line with expectations, after the 0.9% move in June. The core metric, ex food and energy, advanced 0.3%, slightly below estimates of 0.4%. On a year-on-year basis, the CPI increased 5.4%, a touch above market surveys whilst year-on-year ex food and energy came in on the nose at 4.3%.

Delving into the underlying figures we see that used car prices have finally levelled off, gaining just 0.2% after their meteoric rise in recent months. Clothes prices were flat after a 0.7% increase in June, with transportation prices actually declining after a 1% increase at the end of the second quarter.

We also heard from the Fed’s Barkin, who has a more centrist view about the timing for any tapering after some of his colleagues have been pushing for the Fed’s current bond buying to slow as soon as September. He agreed that the country was making progress on the labour front. He said ‘We are closing in. I don’t know exactly when that will be. When we do close in on it, I am very supportive of tapering and moving back toward a normal environment as quickly as the economy allows us’.

However, he does not want to commit to a timetable, believing the Fed should stick to what it has promised ‘buying bonds until the labour market has more fully healed’. He also said he felt inflation ‘seems to have crested’ and should revert in coming months. How far and how fast is the million-dollar question. He believed that some of the dynamics, from supply chain disruptions to strained U.S. relations with China, could keep the pace of price increases higher for longer. Or indeed would the new delta variant have the opposite effect.

We also had a humdinger of an auction. The US Treasury auctioned USD41bn new 10-year bonds. Not only did the auction come over 3bp through the current 10 year, indirect bidders took over 77% of the issue and left primary dealers with less than 10%, the lowest dealer take since at least 2000.