Inflation-adjusted Treasury yields surged to a two-month peak following a stronger-than-anticipated consumer price index, prompting traders to recalibrate their expectations regarding interest rate adjustments. The yield on 10-year Treasury inflation-protected securities (TIPS) reached 2% for the first time since December 12, coinciding with the Federal Reserve’s policy meeting, where indications were given that interest rates had reached their peak.
This move followed a government report revealing a 3.1% increase in the US consumer price index compared to the previous year, surpassing economists’ median forecast of 2.9%, as per a Bloomberg survey. Notably, a significant subset of service prices recorded their most substantial increase in almost two years.
Referred to as 10-year real yields, these rates have surged over 30 basis points this month. This surge comes amidst data showcasing an acceleration in economic activity, thereby tempering expectations of imminent Fed rate cuts. Interest-rate swaps now indicate a decreased likelihood of a cut in May, dropping to approximately 36% from the previous 64% prior to the release of inflation data, with anticipated cuts for the year falling to fewer than 100 basis points.
Here’s an overview of how the market perceives US inflation through various indicators:
Inflation News Bites
- January’s jump in the consumer price index may not be as pronounced in the Fed’s preferred inflation gauge, potentially easing concerns for central bank officials as they evaluate the timing of interest rate adjustments.
- US Treasury Secretary Janet Yellen highlighted progress in combating inflation despite the latest monthly data indicating persistent price increases, particularly in essential household expenses.
- Unexpected easing of Swiss inflation in January may prompt the Swiss National Bank to consider earlier rate cuts.
- Rising prices in recent years have pushed German wages, adjusted for inflation, to levels last observed in 2016, potentially fueling arguments for significant pay raises, a development that could concern the European Central Bank.
Key Upcoming US Releases
- Feb. 15: Import price index
- Feb. 16: Producer price index; University of Michigan survey of inflation expectations
- Feb. 29: Personal income and spending report, including PCE, for January
- March 1: ISM price paid
- March 12: Consumer price index
- March 14: Producer price index
- March 15: Export price index
