Treasury yields tumbled as inflation showed further signs of easing, which could make the case for the Federal Reserve to slow its pace of rate hikes and prevent a harsher economic downturn. Stocks saw mild gains.
(Bloomberg) — Treasury yields tumbled as inflation showed further signs of easing, which could make the case for the Federal Reserve to slow its pace of rate hikes and prevent a harsher economic downturn. Stocks saw mild gains.
Wall Street tried to look past its initial disappointment with a just in-line consumer price index to focus on the idea that a peak in inflation is possibly in the rear view right now. That perception is quite visible in the swap market, which is showing less than 50 basis points of tightening priced in for the next two Fed meetings — implying a small chance of no move at all in March.
None of that means, of course, the Fed will soon declare victory over inflation. No. Resilient consumer demand, particularly for services, combined with a tight labor market is still a significant threat to prices. But the figures overall show things seem to be going in the right direction and that could pave the way for the Fed to downshift to a quarter-point hike at its next meeting.
“Today’s inflation print is another sign that the Fed’s prescription for bringing down high inflation is working,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “Overall, the data set was in line with expectations and a continuation of this trend should bring the Fed’s rate hike expectations down as we continue to get closer to the end of the Fed hiking cycle.”
To Krishna Guha at Evercore ISI, Thursday’s CPI report is indeed consistent with the Fed slowing the pace of rate hikes in February. However, he thinks the central bank would try to make it a “hawkish 25.”
That would possibly be in line with what a raft of Fed officials has been recently telegraphing. In other words, they have signaled openness to making a 25 basis-point rate increase right at their next meeting, while also stressing that the central bank still has more work to do to tame prices — and are not anticipating rate cuts this year.
One clear example came this morning, when Federal Reserve Bank of Philadelphia President Patrick Harker said the central bank should lift interest rates in quarter-point increments “going forward.” At the same time, he also reiterated that officials expect to hold rates at higher levels to give them time to travel through the economy.
Read: Fed’s Bullard Favors Getting Rates Above 5% ‘Soon as Possible’
Read: Fed’s Barkin Says Appropriate to Raise Rates ‘More Deliberately’
Key events this week:
- China trade, Friday
- US University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan, Wells Fargo report earnings, Friday
This week’s MLIVE Pulse Survey:
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.4% as of 1:42 p.m. New York time
- The Nasdaq 100 rose 0.4%
- The Dow Jones Industrial Average rose 0.6%
- The MSCI World index rose 0.8%
Currencies
- The Bloomberg Dollar Spot Index fell 0.9%
- The euro rose 0.9% to $1.0853
- The British pound rose 0.6% to $1.2221
- The Japanese yen rose 2.5% to 129.17 per dollar
Cryptocurrencies
- Bitcoin rose 6.4% to $18,681.13
- Ether rose 5.5% to $1,416.74
Bonds
- The yield on 10-year Treasuries declined nine basis points to 3.45%
- Germany’s 10-year yield declined five basis points to 2.16%
- Britain’s 10-year yield declined eight basis points to 3.33%
Commodities
- West Texas Intermediate crude rose 1.9% to $78.91 a barrel
- Gold futures rose 1.2% to $1,901.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Emily Graffeo, Vildana Hajric and Isabelle Lee.
More stories like this are available on bloomberg.com
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