Markets Prepare for January CPI

Rates grind higher again ahead of Tuesday CPI. This week marked a clear shift in market sentiment, with rates rising throughout as investors became increasingly distressed about a potentially aggressive 2023 rate hike cycle. The onslaught of pessimism was captured by the 2s10s Treasury spread, which widened to -86 bps on Thursday, the largest inversion in over 4 decades. The policy sensitive 2-year yield rose 4bps today and ~24bps on the week, closing at 4.52% after opening the week at 4.29%. A CPI miss on Tuesday would go a long way toward cooling the selloff, where inflation is forecasted to decelerate to 6.2%.

BLS issues updated CPI weightings. As markets closely watch inflation data for signs that Fed policy is working, extra attention is being paid to the pieces that make up different releases – an example was the seasonality adjustment which may have driven higher than expected payrolls figures in January. Ahead of Tuesday’s CPI report, the BLS released updated component weightings for the index. Used cars, which have contributed to deflation in recent months, have declined in important to the calculation. Shelter, however, has increased to 34.4% of the index from 33%. The changes are expected to provide upward pressure on January’s core CPI figure, but in the long run, the expectations for lower housing prices during the year means that the reweighting should help drive lower CPI figures. For information on CPI weights, click here.    

Week ahead. CPI (Tuesday), retail sales (Wednesday), and PPI (Thursday) will headline a data-heavy week. Fed voters Michelle Bowman (hawk), Lorie Logan (neutral), John Williams (hawk), Lisa Cook (dove), and non-voters Loretta Mester (hawk), James Bullard (hawk), Thomas Barkin (hawk) will make public comments.