Core CPI Reaches its Lowest Level Since 2021 But Remains Elevated

Rates rise as CPI declines less than anticipated. Swap rates rose 3-6bps afterCPI came in above forecasts. The move took some time to manifest, as rates were initially lower after the inflation data release. However, concerns about stagnating progress to 2% inflation pushed rates higher throughout the afternoon, while weak demand at a $39B 10y UST auction contributed as well. Meanwhile, equities rallied as the S&P 500 and NASDAQ rose 1.12% and 1.54%, respectively.

CPI hotter than expected, but avoids a major blowout. Consumer prices rose at a greater pace than expected in February, with all but one measure coming in above the forecast. Though the Fed will likely remain cautious after core (YoY and MoM) and headline YoY inflation were 0.1% above expectations, the avoidance of a more significant upside surprise provided some sense of relief. After all, the +3.8% core YoY print is the lowest since May 2021 and a 0.1% decline from January’s +3.9%. Core and headline MoM inflation were +0.4% in February, while headline YoY inflation was +3.2%.

UK labor market show signs of cooling. Britain’s slew of labor data showed a potential slowdown, headlined by an increase in unemployment. The unemployment rate rose to 3.9% from 3.8% previously, which marked the first increase since July 2023. Meanwhile, wage growth (excluding bonuses) unexpectedly dropped to 6.1% while jobless claims increased nearly 17k, its highest increase since last April. A cooler labor market would be welcomed by the BOE as they aim to temper inflation and shift toward rate cuts, where futures markets currently have around three 25bp cuts priced in for 2024.