US Inflation Data Weighs on Treasurys

US equities are trading close to unchanged as investors digest mixed corporate earnings while Treasurys and the dollar are retracing most of yesterday’s move off the back of rising inflation prospects.  Data released today showed a fifth straight monthly advance in US consumer prices in December, with the YoY reading coming in at 2.1%, the largest annual gain since June 2014.  Both headline CPI and core prices (+2.2% YoY), which excludes the volatile food and energy components, came in above the Fed’s 2% target, boosting speculation the Fed will need to implement additional rate hikes in 2017.  A separate report showed industrial production rose by a larger-than-expected 0.8% in December as cooler temperatures in the US boosted output.

Aside from the data, investors tried to make sense of political and economic developments stemming from the lead up to Trump’s inauguration and the World Economic Forum in Davos, Switzerland.  Wilbur Ross, Trump’s nominee to serve as Commerce Secretary, made headlines today by calling China the most protectionist of the world’s major economies in his Senate confirmation hearing.  During his testimony, Ross reiterated that NAFTA will likely be the first thing he and president-elect Trump deal with.  The back and forth with Senate Democrats was rather cordial and Ross wasn’t pressed on what specifically he would seek to change.  In his prepared remarks, Ross warned America’s trading partners that their access to the world’s largest economy will be limited if they don’t practice “fair trade” and cut state control over business.  Out of Davos, Chinese President Xi Jinping said China will seek to build new relations with the US as part of its creation of a “circle of friends” around the world. 

Fed Chair Yellen is scheduled to speak today at 3pm Eastern and investors will look for visibility into the Fed’s thinking on future rate hikes.  The Dow currently trades down 0.2% while the S&P 500 and NASDAQ are largely unchanged on the day.  US Treasury yields and swap rates are up 3 to 7 bps across all major maturities (with the biggest move in the belly for the 2nd consecutive day), while US crude is down nearly 3% on the prospect of rising US shale production and a stronger dollar.