Yield Curve Flattens on Moderating CPI

Treasury yields and swap rates fall as inflation data underwhelms. August’s CPI data failed to show a dramatic acceleration in inflation- a necessary precursor to a surprise taper announcement at next week’s FOMC meeting. As a result, swap rates and Treasury yields fell across a flattening curve – the 10-year Treasury yield declining 4 basis points on the day to close at 1.28%. Breakeven inflation rates also dropped on the day- 10-year implied expectations declining 3.6 basis points to 2.33%. Despite the move lower, both swap rates and breakeven rates remain well within their recent range- both having traded in a 10bp band since mid-August.

U.S. consumer prices rise less than anticipated, but remain elevated. Month-over-month CPI narrowly missed forecasts- rising at a 0.3% rate (vs. 0.4%) while year-over-year CPI came in-line with expectations at 5.3%. Core CPI, which excludes food and energy, missed forecasts by a wider margin- rising only 0.1% month-over-month vs. forecasts of 0.3%. Despite the miss, this month marked the first time in over 30 years that headline CPI has breached 5% for two months in a row.

Small business optimism increased in August, but employers continue to have issues filling vacancies. The NFIB’s Small Business Optimism Index increased to 100.1 in August, up from 99.7 in July. Small business owners continue to face headwinds in hiring with 50% of owners reporting to have job openings they cannot fill, an increase from of 1% from July and a new record high. The increasing job vacancies continue to be well above the 48-year average of 22%.