Pretty simple this morning, at first anyway. Bonds hoped to see just a modicum of relief in the most important data series of 2022, the Consumer Price Index (CPI). Not only was there no relief, but an actual acceleration of inflationary pressure. Monthly core CPI stayed at 0.6 versus a 0.5 forecast. While that may not seem like much, it’s an important edification of all of the Fed’s recent warnings that we have yet to see signs of a shift (there are still “yeah buts” in that debate, but today’s CPI is not one of them!). Bonds sold off instantly and brutally with both MBS and Treasuries at weakest levels in more than a decade.
The impact on Fed rate hike expectations is clear as crystal.
And in general, CPI is the new king of econ data since the big surprise that kicked off the new era of CPI hypervigilance.
After the initial sell-off, something strange or perhaps miraculous, or perhaps temporary is happening. Bonds are bouncing back to levels that aren’t quite so bad. The market may finally be pushing back against the Fed’s credibility seen in the short end of the yield curve. In other words, yes, rate hike expectations are up. 2 year yields are still 14bps higher. But all of that short-end drama increasingly convinces the market that the long end should be heading lower in yield (i.e. higher Fed rates mean lower growth and inflation in the longer run, theoretically). The benefit of such a recovery at current levels is that it would keep yields in the prevailing range and simply leave an asterisk specifying that there had been an intraday breakout.