From a small difference in where CPI (consumer price index) was released vs. where it was expected to be this morning, the 2-year U.S. Treasury yield rose about 20 basis points. Headline CPI came in at +0.4% and it was expected to be +0.3%. Core CPI also came in at +0.4% and it was expected to be +0.3%. On its face, it doesn’t make sense why such a small difference would cause such a big movement in Treasury yields.

For months now, Jerome Powell (and most of the Fed as-of the last meeting) has turned a blind eye to hotter inflation and better-than-expected real economic data. Powell has justified staying with three rate cuts this year by suggesting hotter inflation was possibly from seasonal factors and better-than-expected real economic data wasn’t important because inflation came down last year even with strong economic performance. In a speech on 4/3/2024, in relationship to recent good economic data, he said,

“The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2 percent on a sometimes bumpy path. Labor market rebalancing is evident in data on quits, job openings, surveys of employers and workers, and the continued gradual decline in wage growth. On inflation, it is too soon to say whether the recent readings represent more than just a bump.”

Since that speech, non-farm payrolls beat expectations by 89-thousand jobs with the unemployment rate falling 0.1% and now, a hotter-than-expected CPI suggests that recent inflation is more than a two-month phenomenon. Today’s CPI number represents the breaking of a dam, where the Fed’s hope to cut rates soon and often will now require a downturn in the economic data to be justified. Rates have risen so much because the Fed’s 3-rate cut thesis is being abandoned; at least until the economic data tell a different story. After today’s adjustment, the bond market now expects the Fed to cut rates about 2-times this year.