Risk vs. Reward Tilts to Risk

We received an update on consumer inflation from the Personal Consumption Expenditure (PCE) report.  The Headline PCE figure came in at 2%, and the core rate (which strips out food and energy prices) came in at 1.8%.  Although both were as expected, the Core rate was actually below its originally reported pace of 1.9% for the month prior.  That figure was revised down to 1.8% this month, so there was actually no change month to month.  However, it is important to note that the 2% Headline Rate remains right at the Fed’s target.

Tomorrow we will receive the estimate of new hires in the month of May from the Bureau of Labor Statistics (BLS).  The market is currently anticipating 190,000 new job creations.  Even if the report is below the figure anticipated, a key concern is the wage growth component of the release.  Given the rate of Unemployment at 3.9%, one would expect wage pressure to move higher to attract decent workers.  Higher wage growth generally leads to higher overall consumer inflation, which will drive interest rates higher.

Pending Home Sales came in lower once again this month.  However, this report is heavily driven by the housing inventory available.  There are currently far more homebuyers than there are homes on the market.  As a result, Home Sales are below where they could be.

With bond prices unable to break above their 100 day moving average, there is more risk of rising rates than the potential of rates improving.  As a result, we will maintain our locking bias.