Rates Pull Back After Core CPI Miss

Slight miss in core CPI pulls rates back sharply. Treasury yields and swap rates closed dramatically lower after core CPI showed a deceleration in core inflation, a fact that Fed Governor Lael Brainard was quick to point out in her public comments today. The 2 year through 7 year part of the curve pulled back by nearly 10bps while the long end of the curve was little changed, prompting the 2s10s spread to expand to a 1-month high at 0.32%.

Core inflation decelerates month-over-month, while headline inflation rises. Today’s CPI data for the month of March showed a month-over-month deceleration in core inflation- which declined from 0.5% to 0.3%. Economists have spoken about how base effects make it increasingly challenging to maintain increasingly high inflation rates, and this month may mark the first signs of that in inflation data. Despite the miss, breakevens (a market determined measure of inflation expectations) did not collapse lower and were little changed at the front end of the curve.