December Inflation Higher Than Expected

A relatively quiet economic data week preceded Thursday's Consumer Price Index (CPI) report. Confidence in the market's rate-cut sentiment took a hit last week as the Non-farm Payroll report came in hotter than expected. At the start of this week, Federal Reserve governors, once again on the speaking circuit, pushed back against the early rate-cut narrative. The highly anticipated CPI report, released on Thursday, revealed that December CPI exceeded expectations. Headline CPI year-over-year increased by two-tenths, while core CPI rose by one-tenth year-over-year.

Despite the unexpected CPI news, markets remained relatively calm, with the 10-year yield initially rising about 8 basis points before retreating to pre-report levels. The Producer Price Index (PPI), released on Friday morning, turned out softer than anticipated, with both Headline and Core year-over-year numbers falling below expectations. As of writing this, yields are decreasing as markets try to assess how the PPI number will impact future Fed policy. As mentioned last week, the ongoing tug-of-war between the markets and the Fed regarding rate cuts is expected to persist, resulting in continued volatility.