Daily Market Color

Treasury Yields Drop After Disappointing January Core CPI Data

Muted inflation reading drags rates lower
January’s CPI reading showed core inflation remained non-existent in the month of January- pulling swap rates and Treasury yields lower as a result. Despite the small pullback, long-term rates are still up nearly 30 basis points from the start of the year- buoyed mostly by the promise of additional stimulus and the expectation for an eventual acceleration in inflation.  Major equity indices end the day mixed – the S&P 500 falling 0.1% while the DJIA rose 0.2% to a record high.
CPI rises 0.30% in January, but almost entirely due to rising energy costs
January’s CPI reading showed a price increase of 0.30%- in line with expectations but driven entirely by rising energy prices.  Core CPI, which excludes food and energy prices, was completely unchanged, well below expectations that had called for a 0.2% increase. Nonetheless, markets continue to price in rising inflation in the future- breakeven markets implying an annualized inflation rate of 2.16% by year-end.
Chair Jerome Powell re-affirms Fed’s monetary policy will remain “patiently accommodative”
During his speech today, Powell commented that the current unemployment rate is “dramatically understated,” estimating the true level is around 10%.  He added the US is “a long way” from full employment and requires “more than supportive monetary policy.”  He also quelled concerns of rapid inflation, adding that near-term increases are “really not going to mean very much” given last year’s low levels.
US budget deficit widens by $162.8 billion in January
The budget gap now totals a record $736 billion, driven higher last month from direct stimulus check distribution.  The deficit has risen 89% in the first quarter of 2021, as receipts and outlays rose 1% and 23%, respectively.  The budget deficit could continue to widen in the coming months as Congress considers passing a $1.9 trillion stimulus bill.

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