In mid-January, markets were pricing 170 basis in points in rate cuts this year (chart below, red line). After a series of stronger-than-expected data – capped off by somewhat higher-than-expected consumer and producer inflation data this week – markets expectations are now in line with the Federal Reserve’s projected 75 basis points in cuts (orange dashed line).
This shift helps explain why 10-year Treasury yields are up 20 basis points in the last week to 4.3%. Equity markets seem less concerned, however, with the major equity indices roughly flat. That may be because the underlying details of the inflation reports were less concerning than the headline numbers suggest.
Headline CPI inflation increased 0.4% after a surprise 0.3% increase in January, pushing the year-over-year rate up to 3.2% p.a. from 3.1% (chart below, orange line). Core CPI inflation, however, did slip to 3.8% p.a. from 3.9% (blue line). Still, this report suggests that January’s surprise strength may have been noise, with rents reverting to its recent trend and core services excluding housing growing at half January’s pace.
Core producer price inflation rose 0.3%, with goods and services both increasing, more than offsetting the 0.3% drop in margins. And unexpected 1% and 4.4% increases in food and energy prices, respectively, pushed up headline PPI inflation 0.6% from January – double expectations.
Market measures show energy prices increased so far in March. Oil prices are up about 5% in the last week, with U.S. stockpiles falling, a drone strike hitting a Russian oil refinery, and International Energy Agency now estimating global oil markets will face a deficit throughout 2024.
Friday’s jobs report provided the one bit of below-expectations inflation news, with wages only increasing 0.1%. On the whole, the report was mixed. While the economy added 275,000 jobs in February – well above the 200,000 estimates – the unemployment rate rose to a two-year high of 3.9% (chart below).
Still, with the unemployment rate low by historical standards, the labor market remains relatively tight.
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