Inflation Set to Remain Sticky as Fed Keeps Policy Tight and Treasury Yields Rise

Economists are predicting that the overall consumer price index will rise 0.5% in January, after December's upwardly revised 0.1% gain.^[0] This would lower the annual rate to 6.2%, down from 6.5%.^[1] Core CPI, which excludes food and energy, is expected to rise 0.3%, which will bring the core CPI inflation rate to 5.5%.^[2]

The data supports the idea that inflation will remain sticky and not fall as quickly as the equity market initially believed.^[3] This means the Federal Reserve will keep policy tight for the entirety of 2023.^[4] The risk is that the Fed's target of a 5.1% terminal rate may not be low enough, and the Fed will need to push rates even higher than previously estimated.^[5]

On Tuesday, Treasury yields increased, particularly with the two-year note, which is more susceptible to Federal Reserve policy changes, rising up to 12 basis points to a near 4.64% mark, the most considerable since November and within a 20 basis point range of last year's long-term peak. On Wednesday, the 10-year U.S. treasury yield closed at its highest point since the end of December, reaching 3.8%.

Investors have been increasing their bets on how far the Fed will raise rates this tightening cycle.^[6] They now see the federal funds rate climbing past 5.2% in July, compared with a perceived peak rate of 4.9% just two weeks ago.^[7]

Meanwhile, in commodities markets, oil continued to drop as the dollar rose and US stockpiles were estimated to have grown.^[8] West Texas Intermediate (WTI) crude futures, the US benchmark, fell 1% Wednesday morning to trade around $78.^[8]

Airbnb (ABNB) rallied more than +9% in pre-market trading after reporting its first profitable year in 2022 and unveiling a better-than-expected forecast for the current quarter, citing strong post-pandemic travel demand.^[9]

The betting market for the Federal Reserve's policy rate has increased the likelihood of a 0.25% rate hike in June to around 50%, taking into account potential changes in March and May. It has also reduced the chances of the central bank reducing rates from the peak level this year.

The CME FedWatch Tool projects an 87.8% probability of a quarter-point Fed rate hike in March, bringing the Fed’s target rate to between 4.75% and 5%.

0. “Fade The CPI; Here's What Matters To The Fed, S&P 500” Investor's Business Daily, 13 Feb. 2023, https://www.investors.com/news/economy/fade-the-cpi-inflation-report-what-matters-to-the-fed-sp-500

1. “Stock Market Today: Stocks Struggle for Direction After Inflation Data” Kiplinger's Personal Finance, 14 Feb. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-021423-stocks-struggle-for-direction-after-inflation-data

2. “Consumer prices rose 6.4% in January” Fox Business, 14 Feb. 2023, https://www.foxbusiness.com/economy/will-cpi-reinforce-powells-disinflation-view

3. “Uh-Oh: Why These 2 Key Inflation Indicators Are Cause For Worry – SPDR S&P 500 (ARCA:SPY)” Benzinga, 16 Feb. 2023, https://www.benzinga.com/news/23/02/30945850/uh-oh-why-these-2-key-inflation-indicators-are-cause-for-worry

4. “January Inflation Deals A Big Blow To The Bulls' Narrative” Seeking Alpha, 14 Feb. 2023, https://seekingalpha.com/article/4578177-january-inflation-deals-blow-to-bull-narrative

5. “Hot Retail Sales Join Hot Jobs Data—How Will the Fed Respond?” The Ticker Tape, 15 Feb. 2023, https://tickertape.tdameritrade.com/market-news/hot-retail-sales-join-hot-jobs-data-how-will-the-fed-respond–19393

6. “CNBC Daily Open: U.S. stocks don't seem bothered by inflation, ignore jump in retail sales” CNBC, 16 Feb. 2023, https://www.cnbc.com/2023/02/16/stock-markets-us-stocks-dont-seem-bothered-by-inflation.html

7. “Stocks Sink as Fed Officials Embrace Bigger Hikes: Markets Wrap” Yahoo! Voices, 16 Feb. 2023, https://www.yahoo.com/now/asia-stocks-rise-wall-street-223547251.html

8. “Stock market news today: Stocks rise after strong retail sales data” Yahoo News, 15 Feb. 2023, https://news.yahoo.com/stock-market-news-today-february-15-2023-130622082.html

9. “Markets Today: Stocks Fall as Strong U.S. Economic Reports Keep the Fed Hawkish” Barchart, 15 Feb. 2023, https://www.barchart.com/story/news/14226554/markets-today-stocks-fall-as-strong-u-s-economic-reports-keep-the-fed-hawkish