Front-end Treasury yields are down 10 basis points in the initial reaction to the March CPI report. Headline inflation rose just 0.1% m/m, slightly below expectations (0.2%) and driven by a 3.5% m/m decline in energy prices. However, core CPI rose 0.4% in March, as expected but down slightly from a 0.5% m/m rate in February. Year-over-year, headline CPI slowed to 5.0% (5.1% expected), and core CPI ticked up to 5.6% from 5.5% the prior month, as expected. The market reaction (rally in both bonds and equities) is likely puzzling for some given the strong core reading, but there are likely a couple of factors at play. First, whispers ahead of the release of a potential upside surprise for core CPI (0.5% m/m or higher), and on an unrounded basis, the core reading was actually 0.385% m/m. Second, the core reading was boosted by a 0.6% m/m increase in shelter costs, which are expected to fade later this year given the trend in rent prices. For the last several months, Fed Chair Powell has highlighted core services ex-shelter as a metric he and his colleagues are more worried about at this point, and this reading fell to 0.294% from 0.427% the prior month. This report is unlikely to materially alter the perspective of many Fed leaders regarding current inflation risks, particularly as it relates to another potential 25 basis point hike in May. Any decisions beyond that are merely speculative.
Jason Haley
Chief Investment Officer
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