Friday's Market Minute: Inflation Report Reinforces The Fed's Hawkish Stance

Yesterday’s headline CPI report printed slightly higher than expected mainly due to commodity prices, but core inflation continues to drift lower as time passes. With core inflation at 4.1% on a year-over-year basis on top of a stronger than expected jobs report last week, the Fed is likely to remain firm on rates as the economy continues to expand and recession is not on the near horizon.

Both stocks and bonds had a slight negative reaction, but the report does not justify any major change in the inflation outlook, which should have a major short-term impact on markets. The report also reinforces the reality that the Fed finds itself in a challenging position and indicates they will maintain relatively hawkish rhetoric.

Since the FOMC policy meeting last month, investors have been trying to determine whether the Fed will move rates higher by the end of the year. The ten-year Treasury yield has moved higher by nearly 50 basis points in just a few weeks, yet two-year yields remain relatively unchanged.

Since the Fed policy rate closely tracks the two-year treasury yield, the bond market indicates the Fed can afford to remain patient for the time being. It is possible that rates will rise further considering energy prices continue to pressure headline inflation, but we are probably close to the end of the hiking cycle.

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