Tape Card
What’s New
- April CPI Tuesday May 12 is the inflection — expected at 0.6% m/m (down from 0.9%) and (up from 3.3%). expected at 0.4% m/m (up from 0.2%) and (up from 2.6%). Kalshi prediction markets and analyst consensus are aligned at the same numbers, so a clean in-line print isn’t pricing a major surprise. Levels: core 0.4% m/m / 2.7% y/y; headline 0.6% m/m / 3.7% y/y.
- CPI swaps curve has May at ~4.2%, easing through the summer — the curve prices May at ~4.2%, June at ~4.0%, July at ~3.9%, and August at ~3.7%. The shape is heavily oil-dependent: if oil moves higher, the curve goes higher; if Iran simmers and Hormuz reopens, the curve flattens. Levels: May ~4.2% / Jun ~4.0% / Jul ~3.9% / Aug ~3.7%.
The decomposition tells you what the market believes about the Fed — Since the end of March, 10-year real yields have fallen, 10-year inflation expectations have risen, and nominal 10-year yields have gone roughly sideways. The decomposition is the tell: if the market believed the would be aggressive on rates, real yields should be rising. They’re not. The market is willing to bet the Fed will look through this oil shock the way it looked through 2021.
G-3 reaction-function divergence priced in — Markets have moved to price the ECB raising rates two to three times this year and the BOE the same. For the Fed, the market has just removed two or three previously priced cuts — no hikes priced in, just an end to easing. That’s a meaningfully different reaction function from the rest of the BOE and ECB.
Kevin Warsh transition is the wildcard on Fed policy — The market doesn’t know what Warsh’s first policy action looks like once he steps in. Pre-oil shock, his messaging was dovish-leaning, which may be feeding the market’s current read of Fed inaction.
What Changed From Last Week
below the 100/101 inflection — The dollar has tested 100/101 multiple times and hasn’t been able to break through. Same level as last weekend, still unresolved. A hot CPI surprise or oil moving back up could be the catalyst. Levels: 100 / 101.
10-year still testing the multi-year downtrend at the 4.45 area — Last week, the 10-year tested the long-term downtrend from the October 2023 peak. This week it’s at the same area. A sustained break above 4.45 would be a meaningful trend shift and likely open the door toward the 5% area. The chart has a possible cup-and-handle look that supports that bias. Levels: 4.45 area / 5% upside if it breaks.
-dollar correlation flipped since 2022, still holding — The classic textbook is “stronger dollar, weaker oil.” Since 2022, the relationship has flipped — higher oil and stronger dollar move together, lower oil with weaker dollar. Part of why the dollar has weakened slightly recently is that oil has weakened slightly. If oil starts moving back up, the dollar (and rates) likely follow.
Catalysts Ahead
- Tuesday May 12 — April CPI report — The first major inflection point. In-line is the consensus path; a hotter-than-expected core, specifically, would be the surprise that could force the market to start re-pricing Fed reaction function assumptions.
- Iran / Strait of Hormuz developments — Oil could move back above $100, toward $110, if overseas tensions escalate. If things simmer down and the Strait reopens, oil could move into the $70s. That ambiguity is what makes the inflation-curve assumption (a May 4.2% peak, then easing) the highest-uncertainty part of the setup. Levels: oil $70s downside / $100 / $110 upside.
Why This CPI Report Matters
This week we’re going to get April CPI on Tuesday the 12th. This is going to be a fairly important CPI report, only because of how inflation expectations have been coming together over the last two months — with the war and how oil prices have been impacting things.
If you look at real rates and inflation expectations versus nominal rates right now, it appears the market is pricing in a much more dovish Fed — one that’s not going to be responding to higher inflation rates. That could even be one of the reasons we’ve seen equity markets rebound so sharply. The market is trying to get ahead of what will be another inflation cycle with the Fed potentially not doing anything.
We’re going to take a look at the things you need to watch in order to determine whether that’s true for yourself.
What The Numbers Look Like
Let’s start with what we’re looking for. We’re looking for a 0.4% increase month-over-month on core CPI versus estimates of 0.2%. Year-over-year is expected to rise to 2.7% from 2.6%. Headline CPI is expected to rise 0.6% m/m, down from 0.9%, while year-over-year is expected to jump to 3.7% from 3.3%.
I also like to look at Kalshi. They’ve done a very good job in the past of predicting inflation rates, and they sometimes give us a good sense of whether betting markets are expecting hotter or cooler numbers than analysts. Right now, on core CPI year-over-year, Kalshi is looking for 2.7%. On core month-over-month, 0.4%. On headline, 0.6% and 3.7%. So Kalshi and analysts are looking for the same numbers — based on this, we shouldn’t really be expecting any major surprises.
More importantly, when you take a look at the US CPI inflation curve, the picture is interesting. We’re looking for 3.7% in April — but inflation is expected to jump to around 4.2% in May, and then slowly start coming back down: 4.0% in June, 3.9% in July, 3.7% in August.
The only problem with this projection is that it’s really going to be based on where oil goes. If oil prices start going higher again, that’s obviously going to have a big impact on where inflation expectations are — and right now oil’s been chopping sideways. If things develop overseas, oil could move back above $100 and toward $110. If things simmer down and the Strait of Hormuz reopens, oil could move all the way down into the $70s. We don’t really have a sense of what’s likely to happen at this point.
Oil, The Dollar, And Rates
When you compare oil prices to the dollar, there’s a pretty strong correlation over the years — but not the one most people expect. Normally we think “stronger dollar, weaker oil.” That just hasn’t been the case. In fact, it’s been the opposite since 2022, when things kind of flipped: higher oil with stronger dollar, and that relationship has held since.
Part of why we’ve seen the dollar weaken some is because oil prices have weakened some. It probably also has to do with the fact that oil is heavily tied to interest rates. The has moved with oil prices in the past, and so if oil prices start moving higher, you’re likely to see interest rates moving higher. The same is true of . It’s a similar dynamic.
This is one of the reasons why, if you look at the technical charts on things like the dollar, we’re at a fairly important inflection point. The dollar has gotten to the 100, 101 level on a couple of occasions and hasn’t been able to break through. If we were to get a number that was slightly hotter than expected, or if oil prices started moving up again, the dollar could try to challenge 100 — maybe even break through.
On the 10-year, there’s more at stake. The 10-year rate has been in a multi-year consolidation phase after the huge move from 2020 to 2022. If we were to see it break out above the 4.45 area, that would really be a pretty big shift in trend. It would open the door toward the 10-year moving back toward 5% or so. When you look at the chart, you can kind of make out what looks like a cup-and-handle pattern, also suggesting that the 10-year may be biased to move higher.
How The Central Bank Reaction Functions Have Diverged
A lot of the change we’ve seen — with oil higher — has shifted expectations around central banks. The market has moved to price an ECB now likely to raise rates by as many as two to three times. The BOE is also looking at two to three rate hikes. The Fed, on the other hand — the market has just removed two or three rate cuts. No hikes priced in, just the end of the easing cycle.
So you’re clearly seeing a different reaction function priced for the BOE and the ECB versus the Fed. The market thinks the Fed is going to be more willing to look through the impacts of higher inflation due to higher oil prices.
The Decomposition Tells You What The Market Believes
One of the reasons I’ve come to that conclusion: if you look at the current charts of a 10-year CPI swap, a 10-year real rate, and a 10-year nominal rate side by side, what you see is pretty interesting.
Since the end of March, real rates have actually come down. Inflation expectations have actually gone up. Nominal rates have for the most part gone sideways.
This is really meaningful because of how a real rate is constructed. You get the real rate by taking the nominal rate and subtracting the inflation expectation. You can also flip it: the inflation expectation is the nominal rate minus the real rate. In this case I’m looking at it as nominal rates minus inflation expectations.
What’s very clear is that the market is willing to bet the Fed is going to look through this inflation, and that the Fed is not likely to respond at this point. The reason: during this period, the real rate has come down, the inflation expectation has risen, and the nominal rate has barely moved. If the market truly believed the Fed was going to be aggressively raising rates, we should be seeing real rates moving up — meaning the 10-year nominal would be rising at a faster clip than the inflation expectation. That’s not happening yet.
If we were to get a hot inflation report — specifically on core — it could actually cause the market to start rethinking this.
The Kevin Warsh Wildcard
Part of the reason we’re in this setup is that we’re in a transition phase. We don’t really know what Kevin Warsh is going to do as his first policy action once he steps into the role. We know what Jay Powell would have probably done, but we don’t know what Warsh is going to do.
If you base it off what we’ve heard him say prior to the oil shock, it was a much more dovish tilt. That could be part of the thinking you’re seeing in markets overall — basically the bet that the Fed is going to look through this, that the oil shock is more transitory, something that would just fade.
But we don’t know how long oil’s going to stay up, and we don’t really know what the true impacts are going to be — because we haven’t seen inflation come back to target in a number of years.
Hope you found this helpful. We’ll see you again.