February CPI Looms for Market

  • The back-up in yields this week has several reasons driving it but concern about inflation is certainly one of the primary factors.


  • Part of the uncertainty about inflation will be answered by tomorrow’s February CPI report. The news is not expected to be good as the overall monthly CPI is expected up 0.8% taking the year-over-year to 7.8% which would be a new cycle high. The core rate is expected up 0.5% for the month and up 6.4% YoY. That too would be a new cycle high.


  • Keep in mind that these numbers are really before any of the shooting started in Ukraine. The spike in commodities and sanctions, boycotts, etc., will only add fuel to the inflationary fire in March.


  • So, while some big monthly gains from last spring will start to fall out of the yearly calculations in the month’s ahead, we’re now just as likely to get equally large monthly prints (think 0.6% to 0.8%) that keeps the YoY levels rangebound. That’s not what the Fed wants.


  • That reality is likely to keep them in hiking mode for almost all of 2022.


  • The question becomes, given the new global headwinds generated by the war, how much can the economy take before slipping into a recession or slow-growth mode?


  • Several yield curves are already near inversion levels, which often signals a coming recession (see the graph below of the 2yr – 10yr Treasury Spread and recessions in the red bars). It’s a difficult dance for the Fed but we think they are committed to at least getting inflation turning in the right direction and if that means sacrificing some or all economic growth, well so be it.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 1.61 1.80 1.90 2.05 2.38 2.85
0.50 1.59 1.77 1.84 1.94 2.24 2.74
1.00 1.59 1.74 1.81 1.90 2.15 2.61
2.00 1.73 1.75 1.82 2.03 NA
3.00 1.77 1.97 NA
4.00 1.93 NA
5.00 1.89 NA
10.00 NA

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Published: 03/09/22 Author: Thomas R. Fitzgerald