Hot inflation data delays Fed rate-cut bets

The May 13 wholesale inflationThe rate at which prices rise across an economy. print has upended near-term Fed pivot expectations and triggered a sharp repricing of terminal rate assumptions. US producer prices accelerated to 6% year-over-year in April, driven primarily by surging energy costs linked to the Iran war and global supply shocks. This is the fastest pace of producer inflation in four years, contradicting soft-landing narratives and raising stagflation concerns across macro desks.

The immediate market reaction was a sharp steepening of the yield curvePlot of bond yields across maturities.. The 10-year Treasury yield surged to its highest level since July, as investors scrapped bets for near-term Fed cuts. Morgan Stanley raised its S&P 500 target to 8,300, citing strong earnings resilience, but bond markets are clearly repricing inflationThe rate at which prices rise across an economy. risk and Fed durationBond price sensitivity to interest rate changes.. Japanese investors, who had been heavy buyers of long-duration US debt on rate-cut expectations, dumped the most US Treasuries in nearly four years. Turkish, Indian, and other emerging-market central banks have already begun raising their own inflation forecasts to account for the Iran war energy shock.

The Iran conflict has become the decisive variable. Saudi Arabia reported to OPEC that its crude output fell to its lowest level since 1990, due to Persian Gulf export disruptions. Oil inventories are falling at record pace globally according to the IEA, and the Organization of the Petroleum Exporting Countries+ supply cuts show no signs of easing. Lindsey Piegza, Stifel's chief economist, warned that consumers face months of price pressures ahead and that inflationThe rate at which prices rise across an economy. will remain a persistent concern for Fed policy.

The risk to this inflationThe rate at which prices rise across an economy. narrative is that energy prices could cool if the Iran conflict de-escalates or if a Trump-Xi accord reduces geopolitical premium. However, with sticky core services inflation and production bottlenecks evident in supply-chain strain (reported at the highest level since 2022), even oil normalization may not fully unwind the Fed's tightening bias.