The US December CPI was released, in line with expectations. The market remains firmly convinced that there is no reason for the Fed to raise interest rates by 50 basis points at the February FOMC meeting. The performance of US stocks matched yesterday's expectations, with limited rebounds, while US Treasuries benefited significantly, $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$dropping to 3.45.
Specifically, headline CPI turned negative month-over-month, driven by a decline in energy commodity prices pulling overall inflation down. Core CPI’s month-over-month increase was higher than the previous value; new car and used car prices fell significantly, while housing and transportation components continued to drag, making it difficult to eliminate sticky inflation. However, this is not expected to become a factor causing the Fed to hesitate between 25 basis points and 50 basis points, as Powell has repeatedly emphasized that core services inflation is closely related to wage levels, and the decline in hourly earnings in the December nonfarm payrolls report illustrates the issue more clearly.
Before the Fed confirms the endpoint of rate hikes, the downside potential of US Treasury yields outweighs the upside risks. If the expectation of a final rate hike in March does not materialize, US Treasury yields may rise again, depending on the next one to two months of nonfarm payroll and inflation data.