CPI and Bank Reserves

The monthly Consumer Price Index (CPI) report came in yesterday posting the largest monthly gain in over eight years at 0.6%. The goal of the CPI metric is to measure fluctuations in the cost of living in the US by averaging the prices of a basket of essential goods – groceries, medicine, gasoline, etc. This increase is heavily attributable to gasoline prices increasing 12.3% since last months, however consumer goods are also rising. Grocery prices are up 5.6% from a year ago as people cook many more meals home during their quarantine and retail and dining see gains from last month. These gains are positive signs for small businesses that make up around 40%-50% of US GDP.

Public companies are approaching earnings season and multiple banks post enormous cash reserve figures to prove they have a plan to stay solvent. JP Morgan Chase (the largest US bank by assets) posted $10.4 billion to cover potential losses as loan defaults are expected to rise in Q3. This is in addition to the $8 billion it set aside in Q1. While the banks revenue is up 15% from last year, profits are down -105% according to Wall Street Journal. Other large US banks Citigroup and Wells Fargo have found themselves in similar situations.

Bonds are near the top of their trading channel showing little potential upside to floating. We hold a locking bias.