January CPI and Core CPI Expected to Rise, Treasury Yields Climb Accordingly
Economists are expecting the consumer price index (CPI) to rise 0.4% in January, down from December's upwardly revised 0.1% gain. This would translate to an annual rate of 6.2%, a decline from the 6.5% rate in December. Core CPI, which excludes food and energy, is forecast to rise 0.3%, bringing the annual rate to 5.5%. These numbers have led to an increase in treasury yields, with the rate on the two-year notes climbing as much as 12 basis points to nearly 4.64%, the highest since November and within 20 basis points of last year’s multiyear high.
Investors are betting that the federal funds rate will climb to 5.2% by July, and that the Fed will not announce rate cuts until 2024 unless inflation comes down faster than expected. The 10-year Treasury yield rose to 3.81%, a 2023 high, and short-term rates, more closely tied to the Fed, didn't move much.
Since March 2022, the Federal Reserve has taken the step of increasing the rate eight times in order to decelerate the economy and reduce inflation. While Wall Street would like to see rate hikes end, it doesn't want to see the economy go under either. This has led to a shift higher in estimates of what level the Fed will end its series of rate hikes.
Richmond Fed President Thomas Barkin has stated that “if inflation persists at levels well above our target, maybe we’ll have to do more,” while Federal Reserve Bank of Dallas President Lorie Logan said, “we must remain prepared to continue rate increases for a longer period than previously anticipated.”
Oil prices were down, with U.S. crude futures falling 1% to trade around $78 and Brent crude declining 0.8% to $84.88 a barrel. Gold futures were also down 1.1% to $1844.
U.S. inflation is likely to be “far stickier” and could last for a decade, according to Bill Smead, chief investment officer at Smead Capital Management. This is due to the favorable demographics in the United States, coupled with a rise in services inflation to a new four-decade high.
The Commerce Department’s January CPI report showed that prices rose 0.5% from December, on top of the upwardly revised December jump.
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