Economic data is especially important now because the Fed is “data dependent” in determining when and how much to lower interest rates. As I wrote earlier this month (5/3), there was a meaningful downward shift in economic data at the beginning of this month with the weakening of the ISM Manufacturing and Service reports, Non-farm Payrolls, and the Unemployment Rate. Today, that weakening continued in both the CPI (Consumer Price Index) and Retail Sales reports, which were both lower than expectations. Headline CPI came in at 0.3% with an expectation of 0.4%, headline Retail Sales came in at 0.0% with an expectation of 0.4%.

The CPI miss was small and the concerning aspects of inflation (supercore and shelter) remain high so it won’t substantially alter the Fed’s narrative of needing to wait to see further moderation of inflation to lower interest rates. But, the bond market is reacting a lot (Treasury yields falling 8-10 basis points) because the data today further chips away at the narrative the bond market had built which was extrapolating 5-months of good economic data released from December through April into the future.  The “across-the board” weaker economic data released this month acts as a break in that thinking.

As I wrote earlier this month (5/3), “I think that the interest rate back-up since January is over if inflation and consumer spending begins to moderate too.” The economic data showed this today. I think Treasury yields made local peaks at the end of last month (2yr @ 5.04%, 10yr @ 4.71%.) and will generally trend lower with Fed cutting expectations moving sooner.