Rates Spark: A Consensus U.S. CPI Will Not Relieve The Bearish Pressure

2025-01-15 03:30:00 ET

Summary

• Treasuries were happy that we did not get the 0.3% month-on-month that consensus had for the ex-food and energy PPI on Tuesday. We got a surprise 0.0% instead.
• The US CPI report is not what the Fed thought they would see at end-2024. Squint your eyes and you see a 3% inflation rate for December, and month-on-month rates, that when annualised, are in fact pointing closer to 4%.
• This, in part, is why the funds rate cut expectations have collapsed, and Treasury yields are knocking on the door of 5%.
• The bearish pressure for EUR rates remains persistent for now as well.

By Padhraic Garvey, CFA and Benjamin Schroeder

Not much relief expected from US CPI

Treasuries were happy that we did not get the 0.3% month-on-month that consensus had for the ex-food and energy PPI on Tuesday. We got a surprise 0.0% instead! But was that really a surprise? Just based off zero knowledge, the December PPI number is practically always either 0.0% or 0.1% (over the past 15 years). There’s been the odd occurrence of 0.2% here and there (but just three in total), and one outsized 0.7% in 2021 (when we really did have big inflation). So we were not that surprised to see Treasury yields react back up again, as we actually got what we usually get (a subdued December core PPI MoM reading). And PPI inflation is still running at above 3% year-on-year, versus a pre-pandemic tendency in the 2% area....

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