CPI Miss Sends Treasurys, Equities Higher

CPI miss ignites massive bond rally. Treasury yields fell across a steepening curve today, the 2-year and 10-year yields plummeting ~16 and ~11 bps, respectively. The lower-than-expected CPI saw yields drop 20+ basis points to start the session, which recovered slightly throughout the remainder of the day. While the expectation for a 50 bp rate hike is still intact, the inflation data lowered the market’s expectation for the Fed’s terminal rate, which is now hovering closer to 4.85% (to be reached in May 2023). Stocks benefited from a slight boost, the S&P 500 gaining 0.73% and NASDAQ increasing 1.01%.

CPI surprises to the downside again, continues trend from last month. Headline YoY CPI came in at 7.1%, much lower than the forecast of 7.3%, which spurred yet another bond rally. The fall in CPI was attributable to many factors, including a decrease in energy costs (+13.1% YoY, compared to +17.6% in October) and food prices (+10.6% versus +10.9%). Increases in cost of shelter slightly offset these trends, as we saw an increase to 7.1% from 6.9% in October. Meanwhile, core CPI also came in lower than expected, the 6.0% level just slightly lower than the predicted 6.1% mark.

Day ahead. The Fed will make announce its rate hike decision at 2 PM ET, which will be followed by a press conference at 2:30 PM. There will be a few minor data releases before the decision is announced, including import and export prices at 8:30 AM and crude oil stock changes at 10:30 AM.