February 15, 2023
Good morning,
Recall late last year’s concern that the bond market had rallied, perhaps too much, and priced in Fed rate cuts all year long beginning in March. Leading the concerned camp was the Federal Reserve itself. Tuesday morning’s January CPI (Consumer Price Index – a key inflation indicator) rose more than expected. Data releases miss economists’ expectations routinely, but the degree of the miss (over three standard deviations of usual variance in this case) separated this report from routine.
In the grand scheme of things, the bond market was forced to recalibrate its future rate cut expectations on Tuesday and back out some of last year’s over exuberance. It was a correction. The market is now priced with an equal probability of a first rate cut coming in May or June – closer now to the Fed’s expectations.
And what do we do with the CPI report itself? It’s inadvisable to rewrite a market narrative on one data point. History reveals that three standard deviation misses are adjusted a month later, more often than not. Even if the number sticks, I suspect lower rates and slowing growth just get pushed out further on the calendar.
January retail sales figures were released this morning and missed hard. Shoppers spent less across every category. So much for the narrative that the U.S. economy can only surprise to the upside. This doesn’t reverse Tuesday’s CPI effects but does temper them. Bond yields are down; stocks are unchanged in the pre-market.
Be well,
Mike
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