Rates Fall on CPI Day

Rates rally dramatically following headline CPI miss, reverse course later on. Swap rates and Treasury yields fell on the day, with the 2-year yield falling as low as 3.87% just after CPI was released in the morning. Rates rose thereafter, however, with the 2-year yield climbing back up to 3.96% by the session’s end. The odds of a 25bp hike at the upcoming FOMC meeting remain above 70% and are a few percentage points higher than they were yesterday, despite FOMC minutes that revealed that many FOMC officials have lowered their target rate range following recent events within the banking sector. While the minutes painted a cloudy picture regarding the path forward, it was clear that the 25bp hike at March’s meeting was widely supported. 

CPI shows inflation remains elevated. Headline CPI was below expectations and last month’s levels but remained elevated. Core CPI excluding food and energy was in line with expectations and slightly above last month’s levels on a year-over-year basis. The index for shelter was the largest contributor to the headline increase, which more than offset a 3.5% decline in the energy index over the month. In addition, motor vehicle insurance, airline fares, household furnishings and operations and new vehicles increased, while medical care and used cars and trucks decreased on the month. Though headline CPI declined, it will be interesting to monitor OPEC’s recent production cut for impacts on next month’s reading. Altogether, these results tell an inflationary story and complicate upcoming policy decisions.

Day ahead. PPI and initial jobless claims data will lead the session at 8:30 AM. Core PPI is expected to rise to 0.2% from 0.0% MoM, which would be the first increase since November 2022.