Market Awaits January CPI Tomorrow

  • Markets are relatively directionless today as investors await the key January CPI report tomorrow (more on that below).  The week opens with the 10yr note yield at 3.73% and the 2yr yield at 4.55%. The 2yr -10yr inversion continues to flirt with its December cycle low of -84bps, currently sitting at -82.73bps this morning (see graph below).


  • This is an easy week to call the key event and that is tomorrow’s January CPI report. Expectations are for a steamy report with a 0.5% MoM increase in the overall and 0.4% MoM increase in the core. However, given the positive base effects of large 2022 numbers leaving the calculations the YoY numbers are still expected to dip.  The overall YoY is expected to dip from 6.5% to 6.2% and the core YoY from 5.7% to 5.5%. Given the heady expected MoM gains, this is not a report that is likely to alter the Fed’s rate-hiking ambitions.


  • In addition, the whisper is that with used car prices popping higher in January after a six-month decline, there could be an upside surprise to the numbers. During the six-month decline in prices, it took several months to see lower retail CPI prices, so it’ll be interesting to see if the opposite of higher wholesale prices results in immediate increases to retail prices.


  • Another aspect of the report likely to get some attention is the Owners Equivalent Rent (OER) component. At this point it’s widely known that the indicator has a significant lag and is still printing strong 0.8% MoM gains when real-time rents are declining given the Fed’s rate-hiking path. Will we start to see some softening in this metric? Given expectations, the outlook is that it’s too early for that, but it will be something inflation-watchers will be hoping for.


  • The Fed has acknowledged the lagging nature of OER and as a work-around Chair Powell has mentioned core services ex-housing as a key inflation print, so expect that to get attention tomorrow. With annual wage gains high, but decelerating, the Fed is hoping for some good news here but like many aspects of the January report, it may be too early to expect it to deliver.


  • In the meantime, we count eight different Fed members slated to speak this week so expect some headlines off those speeches. St. Louis Fed President James Bullard is speaking on the economy and monetary policy on Thursday so be on the lookout for his comments.



    Agency Indications — FNMA / FHLMC Callable Rates

    Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
    0.25 5.33 5.06 5.01 5.01 5.07 5.53
    0.50 5.31 5.04 4.95 4.90 4.93 5.42
    1.00 5.31 5.01 4.92 4.85 4.84 5.29
    2.00 4.99 4.86 4.77 4.72 NA
    3.00 4.73 4.66 NA
    4.00 4.61 NA
    5.00 4.57 NA
    10.00 NA

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Published: 02/13/23 Author: Thomas R. Fitzgerald