Inflation Slowing?

Bonds see massive rally after CPI release. Treasury yields plummeted after CPI figures came in weaker than expected, with the 2-year yield falling ~25bps to 4.33% and the 10-year yield falling ~27bps to 3.81%. Markets now assign a near 0% probability of a 75bp hike at December’s FOMC meeting, with a smaller 50bp move priced in. Fed officials showed support for a reduction in the pace of rate hikes in the short term. Dallas Fed President Lorie Logan said that “it may be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving,” while Kansas City Fed President Esther George said she sees “several advantages for a steady and deliberate approach to raising the policy rate.” Equities boomed today, the S&P rising over 5.50% and NASDAQ realizing gains of 7.35%.

October CPI change was lower than market estimates. Headline CPI increased 0.4% MoM in October, the same increase as September, and 7.7% YoY, compared to 8.2% last month. Core CPI increased 0.3% MoM, compared to 0.6% in September, and 6.3% YoY, compared to 6.6% in September. Shelter, which increased 0.8% MoM, was the largest driver of the increase and contributed to over 50% of the monthly all-items increase. Energy prices increased 1.8% MoM overall, with fuel oil increasing 19.8% MoM; however, the natural gas index decreased due to milder-than-expected winter weather and higher storage levels in both the U.S. and Europe. This CPI print communicated slowing inflation, but levels remain high.