US Economic Resilience and Hot UK Inflation Data Spur Rate Rise

Short-term rates rise over 14bps after data shows economic resilience. Swap rates and Treasury yields have soared ~20bps higher over the past few sessions as markets speculate that rate cuts may be delayed past March. After Fed Governor Waller spurred yesterday’s rise in rates, strong US economic data and hot UK inflation were catalysts for today’s move. The potentially delayed rate cut timeline forced Wall Street’s “fear gauge” VIX to just under 15, its highest point since November. Equities declined on the session, the SPX, DJIA, and NASDAQ all down 0.25% – 0.60%.

Wave of strong December economic data suppresses rate-cutting bets. Mortgage applications rose by 10.4% in December vs. 9.9% the month prior, while industrial production grew by +0.1% vs. a -0.1% expected decline. Retail sales grew the most in three months on a headline basis and met or exceeded both estimates and last month’s figures across measurements. The trifecta of hot data helped drive the chances of a 25bp rate cut in March down from ~77% last Friday to a coin-toss.

UK inflation rebounds, traders pare back bets on rate cuts. UK CPI prints came in higher than expected across the board, and the headline YoY level (4.0%) increased for the first time since February 2023. A rate cut is now seen as ~54% likely by the end of the UK’s May policy meeting, a ~35% decline from yesterday. Furthermore, futures now suggest a higher probability of four 25bp 2024 rate cuts compared to five projected 25bp cuts as of yesterday.