Inflation driven by oil, oil driven by Hormuz and Uranium

May 22, 2026
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–Rates were higher at the short end yesterday, with 2s up 4.7 bps to 4.085% and 30y essentially unch’d at 5.11. On the SOFR strip, reds (2nd year) were -4.75 to 9604.75, greens -2.375, 9608.625, and blues -1.125, 9601.375. As mentioned previously, all clustered just below 4%. The SOFR setting for May 20 was just 3.50%, right at the lower end of the FF target. Earlier in the month SOFRRATE was around 3.62%. BBG reports that GSE’s awash with cash are pressing SOFR lower. The setting is expected to firm into month end, but the gap between current SOFR and SFRK6 at 9636.0 or 3.64 is quite wide. SFRM6 settled 9632.25.

–In my opinion there’s almost no chance of a move in June at Warsh’s first FOMC, though the July 29 meeting, which will see another PCE price on 25-June, and CPI on 14-July, is an open question. The June FOMC is 17th, with CPI preceding on 10-June. I would note that front month WTI was around $62 in May 2025 and has been around $102 this month.

–Inflation is based on oil, which boils down to Hormuz opening and Iran giving up enriched uranium. It’s also based on data center build-outs; end costs for AI services seem destined to rise. “Uber’s CTO, Praveen Neppalli Naga, revealed that the company completely exhausted its annual AI budget within the first four months of 2026.” From Hedgie on X: “Microsoft canceled its internal Claude Code licenses this week after token-based billing made the cost untenable, even for a company with effectively infinite cloud resources.”

–June treasury options expire today. TYM6 109.25^ settled 21 vs 109-075; TYM current 109-13 with 109.5^ around 18.

Interesting Ed Dowd take on Thoughtful Money:

Ed Dowd on new Thoughtful Money podcast (23 min left mark):

On inflation expectations, 2 scenarios, “$125 oil gets you to 5%; a resolution to the war gets you to around 4% inflation by May…. Cleveland Fed’s Nowcast Inflation is 4.18% for CPI in May and 4.06% for PCE…

5% is in the ballpark…

If we dont get results soon, oil is driving the short term, and if we hold $125, then a ‘cup-and-handle’ tech formation breakout suggests 200 to 250, which will take inflation to 11% by August. [I don’t see a ‘cup and handle’ personally but could see a breakout to 180]