Rates Soar as Hot CPI Complicates Fed Decision Making

Swap rates, Treasury yields reverse course. Tuesday marked a significant risk-on day, with Treasury yields soaring higher (particularly at the short end of the curve) and equities climbing significantly. The move came as fear surrounding banking turmoil eased and core CPI came in above expectations. The policy sensitive 2-year yield rose 27bps to 4.25%, with the likelihood of a 25bp hike next week increasing to 72% from 55% at yesterday’s close. The long end of the curve saw a less significant selloff, the 10-year yield rising 12bps to 3.69%.

February core CPI exceeds estimates, but rate-hike narrative complicated by recent bank failures. US consumer prices rose the most in 5-months during February, an inflationary data point which follows both a slightly higher unemployment print in February as well as a string of recent bank failures. Notably, core CPI beat expectations, driven by increases in shelter, recreation, household furnishings and airfares. Good prices were unchanged in February, after providing disinflationary pressure over the past few months. The figures come during a complicated time for Fed decision makers, with hawkish positioning now being called into question given recent bank failures. Markets which previously expected at least 3 hikes this year and a 50bp hike in March are now reversing their bets. Futures markets currently expect rates to be cut starting in July 2023. 

Day ahead. PPI and retail sales data at 8:30 AM ET will headline a data packed session. Both are expected to decrease from last month’s levels to 0.3% MoM (PPI) and -0.4% (retail sales). Mortgage application and rate data will be released at 7 AM.