Markets Prepare for CPI Tomorrow

Rates rise slightly ahead of CPI tomorrow. Treasury yields rose 1-4 bps across a steepening curve today in a relatively quiet session. Most of the move occurred overnight, and yields were fairly stable throughout the remainder of the session. Chair Powell’s relatively hawkish testimony to Congress had an immaterial impact on yields, with most attention geared toward consumer inflation data. Meanwhile, equities were mixed, with the NASDAQ down 0.36% and the DJIA up 0.28%.

Core CPI is expected to be mixed in January. Core consumer price growth is expected to have slowed by 0.1% to 3.1% YoY, which would be the slowest growth rate since April 2021. The data would mark another positive sign for doves after both core CPI readings slowed in December from November. However, CPI has generally proven robust across recent readings, and the core MoM measure is expected to have accelerated in January by 0.1% to 0.3%. The data could be of particular importance following December’s promising figures, as another cool print could signal a trend toward a prolonged slowdown.

Chair Powell tells Congress the Fed will be patient.  Powell spent time during the first day of his semiannual Senate Banking Committee testimony to reiterate that the Fed will remain cautious before further rate cuts. He said, “We know that reducing policy restraint too fast or too much could hinder progress on inflation,” doubling down on his messaging at the January FOMC meeting. He added that the Fed’s policy stance is now “significantly less restrictive than it had been” and that there’s no rush to further adjust policy, while also acknowledging that moving too slowly could damage the economy and labor market. As expected, he was also asked about the impact of tariffs on monetary policy. He said that he acknowledges free trade doesn’t work when certain countries don’t play fairly, echoing recent remarks from Treasury Secretary Bessent. When asked if the Fed will respond to tariffs, he refrained from offering specific courses of action and noted that the impact of tariffs remains uncertain.