The Fed has its back against the wall. The core CPI (ex-food, energy & shelter) climbed by an annualised 3.31% in Q1. The 3-month annualised rate for the core services ex-energy & shelter CPI surged 7.79% in March. Wednesday’s CPI report was followed by a very disappointing $39bn auction of 10-year notes, pushing bond yields even higher.
Treasuries will keep selling off until the Fed reaffirms its commitment to getting inflation sustainably back to 2%, and until term premia normalise. The long-term risks to the deficit from demographics and climate change should be reflected in positive term premia.
Climate physical and transition risks already putting upward pressure on both motor vehicle insurance and maintenance & repair costs. The CPI likely understates the true rise in homeowners’ insurance costs. Ocean temperatures have been shattering records, making powerful storms more likely and enabling them to intensify more quickly. Colorado State University hurricane researchers are anticipating that the 2024 Atlantic basin hurricane season will be “extremely active”. This could push insurance prices even higher this year.
Utilities are predicting a “tidal wave” of new demand from data centres, with some power companies sharp raising their projected electricity sales. The cost of the clean energy transition will be even higher in an environment of surging AI demand. Taiwan exports rebounded 18.9% y/y in March, led by a 165% y/y surge in information, communication, and audio-video products.
