Bond Report: 10 and 30-year Treasury yields rise after inflation report

The Federal Reserve’s preferred measure of inflation, PCE prices index, climbed 0.4% in May to mark the third straight big increase, new government figures show. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% advance.

A separate measure of inflation that strips out food and energy also climbed to the highest level since 1992. The core PCE price index moved up 0.5% in May. That nudged the increase over the past 12 months to 3.4% from 3.1%.

The report comes amid a worry about surging inflation, Treasury investors will be closely watching the PCE for signs that parts of the economy are overheating in the recovery phase from COVID.

Read: Consumers are feeling the pinch from higher inflation and they don’t like it

Also: Why aren’t Americans happier about the economy? They are paying higher prices for almost everything

The Fed has said that it views PCE as its preferred metric because it is believed to reflect changes in prices that the Labor Department’s consumer-price index may not. The PCE puts more weight on medical expenses and tracks both direct and indirect costs borne by consumers.

A measures of consumer spending was down 2% in May, while spending was flat.

The PCE data comes after CPI data for May showed that the cost of living surged, driving the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans as the economy fully reopens. 

Some strategists argue that while the Fed insists inflation will be short-lived, the next key economic report to watch will be next week’s monthly employment figures.

On Friday, Federal Reserve President of Minneapolis Neel Kashkari said he expects recent high inflation readings not to last, and labor shortages to resolve themselves by the fall, in a virtual event hosted by the Minnesota Council of Nonprofits and the Minnesota Council of Foundations. 

Read: Inflation is surging. How high will it go? Check out MarketWatch’s new tracker.

Some selling pressure for long-dated Treasurys also come as the Dow Jones Industrial Average
DJIA,
+0.70%,
the S&P 500 index
SPX,
+0.28%
and the Nasdaq Composite Index
COMP,
-0.01%
are on track for strong weekly gains.

Investors also are weighing the prospect of a sizable infrastructure spending bill after President Joe Biden announced that he and a bipartisan group of lawmakers had a deal on a $1 trillion infrastructure package.

Read:Infrastructure and the markets—here’s what the $1 trillion means

In other data, the University of Michigan’s consumer-sentiment index reading for June U.S. slipped in the second half of June, remaining at subdued levels. The reading was 85.5 in June, down from the midmonth flash estimate of 86.4 but above the 82.9 reading registered in May. Economists had expected the gauge to tick up to 86.5 from a reading of 86.4 in May.

A number of Fed speakers are on deck Friday, including Cleveland Fed President Loretta Mester, who moderates a policy discussion on ‘What inclusive recovery looks like in Midwest’ at 11:35 a.m.

Boston Fed President Eric Rosengren talks about financial stability to the Official Monetary and Financial Institutions Forum’s Fedweek series at 1 p.m., and New York Fed President John Williams talks to the University of California education abroad program at 3 p.m.

What strategists are saying

“In the week ahead, the calendar would suggest that the only thing of relevance is the June employment report and we see little reason to argue with this logic,” wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery in a daily note.

“The Fed has effectively pivoted and while there are ramifications for the trading dynamics in the US rates market for the coming months, the more immediate skew is toward a period of consolidation—all else being equal,” the BMO analysts wrote.