Fin-X Pulse: Yields Rise on US CPI Surprise and Hawkish Comments
- nav719
- Feb 13
- 3 min read
An upside surprise in CPI put Fed cuts in doubt and sent yields sharply higher overnight. We anticipate steady Fed Funds rates for now, but more volatile long-term yields ahead.
The headline rate of US CPI jumped by +0.5% in January, up from +0.4% in December, the most since August 2023 and exceeding all forecasts in Bloomberg’s survey of economists, where the consensus expectation was for a slightly lower +0.3% print.
The core ex-food and energy index jumped +0.4%, up from +0.2% in December and the highest reading since March last year. It exceeded all but 5 of 73 forecasts.
Almost 30% of the total CPI gain came from shelter costs (+0.4% in January and +4.4% yoy), although shelter costs are expected to decelerate later this year.
Food prices accelerated from +0.4% in December to +0.5% in January. Egg prices, which are a focus of political attention, soared by +15.2% during the month.
The energy index increased +1.1% in January and +1.0% over the last year. The gasoline index increased +1.8% over the month.
The Fed's "supercore" measure of core services ex-shelter surged to +0.8% and declined by just 3bps to +4.02% yoy.
Following up with testimony in Congress, Fed Chair Jerome Powell said, "I would say we’re close, but not there on inflation. Last year, inflation was 2.6% - so great progress - but we’re not quite there yet. So we want to keep policy restrictive for now". Yesterday he said that the FOMC could afford to take its time before altering the Fed Funds rate.
Following the inflation print, the market moved to not fully price the next cut by the Fed until December this year and only a second -0.25% cut to 3.8% by the end of 2026.
S&P500 6,051 -0.3%, Nasdaq Comp. 19,650 (lunch), S&P/ASX200 future 8,486 (lunch),
US 2yr 4.35% +7bps, US 10yr 4.62% +7bps
US dollar (DXY) index 108.0 (lunch), AUDUSD 0.6280 -0.2%, Gold US$/oz 2,904 +0.2%
Fin-X Wealth View
According to some economists, new seasonal adjustment factors may have played some role in the significant upside surprises. Even so, the strength was fairly broad, and the fact that supercore services remain high is a concern. The 2yr yield moved back above the current Fed Funds rate.
The Fed will be at pains to keep inflation expectations well-anchored, and that won't be easy against a backdrop of constant tariff talk from the White House. The best that Jerome Powell can do is guide for steady short-term rates, as he has done. But the chances that longer-term rates remain steady in a more volatile world seem low. Higher bond yield volatility seems very likely.
The outlining of the US position on Ukraine could yet prove significant, particularly regarding energy markets. Europeans are dismayed (to say the least) by the change of policy direction to be more favourable to Russia. They are unlikely to fall into line without some resistance, with security likely being a higher priority than economics in the near term.
Disclaimer
The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.