May CPI came in at 4.2% annually — the hottest print in three years — with energy prices up 23.5% year-over-year doing the heavy lifting, while core inflation ticked higher to 2.9% and labor markets added 172,000 jobs against expectations of roughly half that. The Fed's hold at 3.5%-3.75% is looking increasingly uncomfortable, and the June 24 stress test results arrive into a market already repricing risk. BEARISH conviction stays firm — this data does not give Warsh or the committee an exit ramp.
May CPI printed 4.2% year-over-year, the highest reading in three years. Energy is the accelerant — up 3.9% in a single month and 23.5% on an annual basis. That is not a rounding error. That is a structural repricing of energy costs working its way through every cost curve in the economy, from manufacturing inputs to freight to household budgets. The headline number matched expectations, which is the only reason markets did not crater on release. But matching a bad expectation is not a clean bill of health.
Core CPI, the number the Fed actually targets its credibility on, moved from 2.8% to 2.9% year-over-year. Small increment, wrong direction. Shelter costs held at 3.4% annually and represent over a third of the index weight — that component does not turn fast. Core goods are accelerating into a supply chain environment J.P. Morgan flags as increasingly pressured, with global factory output running well above forecast and transportation costs rising. The pieces are aligning for a second-leg inflation problem, not a resolution.
The labor market is not giving the Fed any cover to pause and wait. May payrolls came in at 172,000 — more than double analyst expectations — with upward revisions of 93,000 jobs added to prior months. The three-month average from March through May hit 190,000, triple the pace from a year ago. Unemployment held at 4.3%. Healthcare added over 600,000 jobs in the past twelve months. Leisure and hospitality added 70,000 in May alone. A labor market this resilient, running alongside a 4.2% CPI print, is not the combination that unlocks rate cuts. It is the combination that locks in a hike discussion.
The MOVE index — Treasury volatility — is up 7.07% today and has climbed 12.28% year-to-date. That is the bond market telling you it does not have conviction in the current rate path. TLT fell 0.76% today and sits at $86.09 with a YTD gain of just 0.79% — long duration is barely holding its head above water even after a year when Treasury bonds have rallied modestly on a 52-week basis. The equity market, S&P 500 at $7,472.79 with a 24.03% 52-week gain, is still priced for a soft-landing narrative that the data is systematically eroding.
Warsh stripped the June FOMC statement to 130 words and moved the median year-end dot to 3.8%. Nine officials already penciled in at least one hike. Core PCE — the Fed's actual preferred gauge — has not yet printed for June. If it accelerates above 3.2%, the July meeting becomes live in a way markets are not fully priced for. Inflation expectations from consumers ticked down slightly to 3.5% one-year-ahead in May, but that is still elevated and comes off what was the highest reading in a year. The Fed cannot lean on anchored expectations as a shield when the realized data is running this hot. The setup remains bearish for duration and for risk assets priced on rate-cut optionality.