The recent volatility in the Treasury market (^TYX, ^TNX, ^FVX) stems from January's surprising inflation reading, which was hotter than expected — affecting interest rate cut projections.
Blake Gwinn, RBC Capital Markets Head of US Rates Strategy, joins Morning Brief to discuss the market's reaction to the Consumer Price Index (CPI) print that came out Wednesday.
"I think the fact that we had that sell off yesterday, clearly it still took a few people by surprise. I think there was this kind of growing narrative just in the week before the print," Gwinn says. "It kind of went too far and then pulled back a little bit where some people were coming out and saying, 'Well, after two years of this, the seasonal adjustment factor should be starting to kind of normalize. Maybe it's not going to be as bad this time around...'"
Gwinn highlights that despite expectations for a softer inflation reading, the numbers spooked investors and perhaps even the Federal Reserve; the central bank's chair, Jerome Powell, said officials still weren't "quite there yet" to their 2% inflation target.
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The impact of this data suggests that interest rate cuts are unlikely to materialize this early in 2025. "So even if it's mechanical, even if they [Fed] can kind of write it off and say, 'Well, the pass-through to core PCE [Personal Consumption Expenditures] is not that bad.' It's just very hard to come back with a cut in March and probably even May," Gwinn says.
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This post was written by Josh Lynch