Market Priced For Well-Anchored Inflation Expectations

BMO note that “unlike during the peak of the pandemic when the primary driver of data apathy was the notion that the magnitude of the moves simply lacked context for investors, the willingness of rates to ignore decades-high CPI figures is hinting at something more prosaic; namely that the Fed’s threshold for inflation to justify rate normalisation has long-since been met and therefore any upside surprise is a shoulder-shruggable event. One might glibly conclude, ‘hey, this isn’t going to get the Fed to hike any faster’ and to a large extent that is true. However, the recent trend in consumer prices has certainly brought forward the FOMC’s liftoff timing and the balance sheet runoff into the spotlight. Both of which are clearly a function of inflation, as well as Powell’s reframing of price-stability as key for hiring decisions.”

• “In keeping with the theme of inaction speaking louder than words, the absence of a meaningful selloff further out the curve following the solid CPI figures is notable. Our read at this stage in the cycle is that the bulk of the bearish response in Treasuries associated with inflation will be absorbed by the 2- to 5-year sector and thereby exaggerate the flattening. The most compelling path toward a bear steepener would be in the event investors lose confidence in the Fed’s ability to contain the amount of inflation flowing through the system and therefore demand greater compensation to move out the curve. Given that neither outcome was discernible on Wednesday (at least not on a net basis), we’re interpreting the session as an endorsement of the extent of tightening currently assumed with enough confidence that it will ultimately prove sufficient to keep inflation expectations well anchored.”