Hawkish Sentiment Rebounds on Hot CPI Print

Rates grind higher after CPI beat. Treasury yields rose across a flattening curve today, with the policy sensitive 2-year yield increasing ~10bps to 4.61% after a significant CPI beat this morning. Futures are now pricing in nearly even odds for a 25bp rate increase in June, with the same 25bp hike a near lock in both March and May. This is vastly different than what futures suggested at the beginning of February, where no hikes were expected after a likely 25bp hike in March. Equities were able to avoid a major setback on the day, with the S&P down .03% and NASDAQ rising .57%.

January CPI exceeds estimates, prompting hawkish Fedspeak. Fed officials offered hawkish commentary today following strong CPI data. Housing costs contributed to almost 50% of the monthly increase, along with increased energy costs, clothing, and services. Richmond Fed President Barkin said that if inflation continued to be above target, “maybe we’ll have to do more”. Dallas Fed President Logan echoed the sentiment, saying that “we must remain prepared to continue rate increases for a longer period than previously anticipated”. Philadelphia Fed President Harker provided a clearer outlook, saying that policymakers will need to hike rates above 5%, and possibly higher, and New York Fed President Williams said that a 5% – 5.5% Fed Funds rate at YE2023 is still an appropriate outlook given continued labor market strength. Given the strong figures, the concern that price pressures will become entrenched in the US economy has been renewed – former PIMCO CEO Mohammad El-Erian, a prolific speaker about financial markets, said today that he thinks the Fed’s 2% inflation target may be too low. 

Day ahead. Tomorrow’s session will be data-heavy, with retail sales at 8:30 the highlight. January’s retail sales figure is forecasted to rise to 2.0% from -1.1% in December, which would be the highest level since January of last year. Mortgage data will also be released in the early morning.