Tuesday's CPI Report will be Watched Closely by the Bond Market

Inflation is likely to be harder to control than market expectations as the yield on the 10-year U.S. Treasury Note TY00 -0.21% has moved higher recently.

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During the past few days, the yield on this bond has risen from 3.4% to 3.74%, which is inversely proportional to the price of the bond.

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Nevertheless, take into account the fact that the yield has fallen from around 3.9% at the beginning of the year to 4.23% in late October, compared to 3.9% at the beginning of the year.

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There is a warning from Pimco's senior bond portfolio manager, Mike Cudzil, who warns against “trying to translate 15 basis-point moves into a narrative.”

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There is a 100th of a percentage point that is referred to as a basis point.

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Cudzil believes inflation is moving in the right direction at the moment.

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In his book, he points out that based on inflation-protected Treasury securities, or TIPS for short, the 10-year annualized inflation break-even rate was recently around 2.35%.

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Has the yield on the 10-year Treasury increased recently?

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“Markets are trying to assign perhaps a slightly higher probability that there's a chance that inflation will remain for a little bit longer than previously thought,” he says --or that it could end up being a little bit higher than previously thought.”

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Cudzil, on the other hand, anticipates that the core Consumer Price Index, or CPI, will end the year below 3%. The Consumer Price Index, or CPI, increased at a rate of 5.7% in December, which is well below the rate of 9.1% seen in mid-2022.

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However, many in the market were taken by surprise when a report on Feb. 3 revealed that nonfarm payrolls increased by an unexpected 517,000 in January.

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There have been some concerns raised about how long a higher level of inflation could persist and how long and how high the Federal Reserve will be forced to continue raising interest rates in order to achieve this.

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According to Torsten Slok, an economist at Apollo Global Management who wrote in an email to clients on Friday, “Inflation remains a concern” and that “the evidence is accumulating that inflation will indeed remain more persistent.”

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Aside from his expectation that the housing market is bottoming, a strong labor market, and the impact of China's reopening on the price of commodities, he listed ten reasons for his optimism.

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In his view, Marvin Loh, a senior global macro strategist at State Street, believes that sentiment towards the Federal Reserve and inflation has once again shifted.

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Some in the market were of the opinion earlier this year that the Fed wouldn't have to be as aggressive in raising rates as it had been in the past, he says. It is likely that if it gets more aggressive, it will be able to cut rates fairly aggressively in the future because inflation will be predictable, says Loh.

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His expectation is that the Federal Reserve will raise short-term interest rates at least twice more, most probably in increments of 25 basis points each time.

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“At one point, it was expected that we would be done with rate hikes by March, according to Loh, and we would be done with rate hikes altogether.

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Those days are over.

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When the January CPI is released on Tuesday, there is no doubt that the bond market will be paying very close attention to what it has to say.