The consumer price index (CPI) increased 0.3% last month after gaining 0.2% in December amid a surge in the cost of shelter, the Labor Department said on Tuesday. In the 12 months through January, the CPI increased 3.1%. Economists polled by Reuters had forecast the CPI would gain 0.2% on the month and 2.9% on a year-on-year basis.
The yield on the benchmark U.S. 10-year Treasury note rose 11.1 basis points to 4.281% after reaching 4.297%, it’s highest level since Dec. 4. The yield on the 30-year bond rose 8.2 basis points to 4.4521% after hitting a two-month high of 4.454%.
“A slightly hot CPI really sent a chill down the spine of investors. The Fed doesn’t have a coherent set of criteria for cutting, so for all we know this resets the clock,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“If cutting is a confidence game, we don’t know when enough progress is enough or whether mild setbacks undermine their confidence. No wonder bond volatility is elevated.”
After the data, expectations rose that the Fed will likely not cut rates until its June 11-12 policy meeting, with CME Group’s FedWatch Tool showing a 78.5% chance for a cut of at least 25 basis points at that meeting. Expectations for a cut at the April 30-May 1 meeting fell to 38.1% from 60.7% on Monday. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 31.7 basis points, from a low of negative 32.1 on Monday. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, surged 12.6 basis points to 4.5964% after reaching 4.639%, its highest level since Dec. 13.
Yields have been moving higher in recent days, as the latest U.S. payrolls report showed the labor market remains on solid footing while several U.S. central bank officials, including Fed Chair Jerome Powell, indicated they want to see further evidence that inflation was cooling before reducing rates.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.361%, after closing at 2.303% on Monday.
The 10-year TIPS breakeven rate was last at 2.281%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Paul Simao)
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