Consumer Pricing Inflation for January wreaks havoc in the midst of a stellar earnings report week

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Perhaps the biggest news release of the week was the Bureau of Labor Statistics Consumer Price Inflation (CPI) January report. Inflation was reported at 7.5% higher from a year ago. Analysts widely expected a 7.2% increase, so the report was disappointing and sent US equity markets down. This is the 14th consecutive month that consumer inflation has increased. It puts more pressure on the Federal Reserve to raise interest rates. There was brief speculation that the Fed may raise rates in February as an emergency measure rather than waiting until the mid-March meeting but now looks unlikely.

The fastest rate of annual CPI growth since 1982 — pushed market odds of a 50-basis-point hike to about 94% on Feb. 10, up from less than 8% just a month earlier, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. This caused most bond yields to increase sharply on Thursday, sending prices down.

The 10-year Treasury Note yield broke just above 2% on Thursday before dropping on Friday. The 10-year has not been above 2% since mid 2019. We can expect bond yields to continue their rise, and bond prices continue their fall, if inflation reports keep the incremental increase.

The Fed’s goal now is to convince markets it can get inflation under control without overtightening. It’s a delicate balance and one that the Fed has historically had trouble getting right in real time. However, mistakes have usually come when we’re deeper into the cycle and early rate hikes are rarely a problem. We can expect more volatility flare ups until the March 15-16 meeting.

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