Treasury yields edge lower ahead of CPI data

However, the core measures , which strip out volatile items like food and energy, are expected to be sticky, with the annual rise unchanged from September at 4.1% and the monthly measurement remaining at 0.3%.

Headline CPI inflation hit a multi decade high of 9.1% in June last year, prompting the Federal Reserve to raise interest rates from zero to more than 5% since the spring of 2022.

The subsequent easing of inflationary pressures has helped the market hope the central bank is now finished tightening policy for this cycle. So for Treasury’s to hold, or even extend their recent rally — 10-year yields rose above 5% last month and are now around 4.62% — it may be necessary for the CPI report to hold no surprises.

Fed officials making comments on Tuesday include Richmond Fed President Thomas Barkin, who will speak on the economic outlook at 8:30 a.m.; Fed Vice Chair for Supervision Michael Barr, who testifies to a Senate panel at 10 a.m.; and Chicago Fed President Austan Goolsbee, who will talk on the economic and policy outlook at 12:45 p.m.

Before all that, markets are pricing in an 86% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting at the end of January is priced at 25%.

The central bank is not expected to take its Fed funds rate target back down to around 5% until October 2024, according to 30-day Fed Funds futures.

What are analysts saying

“Going forward, we expect monthly core CPI inflation to remain around 0.3% in the next few months, ” said the economics team at Goldman Sachs, led by Jan Hatzius.

“We see further disinflation in the pipeline in 2024 from rebalancing in the auto, housing rental, and labor markets, though we expect a small offset from a delayed acceleration in healthcare. We forecast year-over-year core CPI inflation of 4.0% in December 2023 and 2.7% in December 2024.”