US Bond Yields Rally Further Ahead of a Major US Inflation Report

US Bond Yields Rally Further Ahead of a Major US Inflation Report
US Bond Yields Rally Further Ahead of a Major US Inflation Report
A major US inflation report is expected to show the pace of overall and core CPI inflation slowing in January. The data should be encouraging for the Fed, which is seeking to tame inflation and avoid a recession.

Inflation is the price of goods and services, typically measured by consumer prices or wholesale prices. Inflation has accelerated in recent years as the Federal Reserve (the Fed) has tightened monetary policy, raising short-term interest rates and squeezing demand for goods.

The Fed’s goal is to bring inflation back within 2% of its target. It has been steadily raising short-term rates in an effort to tame high inflation, and it expects to keep doing so for some time.

Tuesday’s inflation report should offer investors a glimpse into how much more the Fed will have to hike interest rates in order to reach its 2% target. The report is expected to show overall inflation slowed to 6.2% in January from a peak of more than 9% during the summer.

It’s also important to remember that the rate of inflation is a function of broader economic growth, and that the economy is still growing. That’s why, even as the Fed raises rates in an effort to tame inflation, it is likely that growth will continue to strengthen.

What’s more, if the economy does end up in recession, it would be much easier for the Fed to bring inflation down to the target, since the recession itself would force a decline in prices. That’s why it’s crucial for the Fed to take its time in bringing inflation back under control, rather than trying to speed up the process.

Another reason to watch the inflation report is that it will give us a glimpse of how households have adjusted their spending as inflation has surged. This will give investors an idea of whether or not they should be worried about a recession, especially given that the labor market remains solid.

Traders will be watching Tuesday’s inflation report closely to see how much it impacts the market, as well as what happens in other key indicators of the economy over the week. A report Wednesday will show how inflation slowed at the wholesale level last month, and a Friday report should highlight how much inflation households are prepared for in upcoming years.

As for the long-term, the bond market has suffered from a large, rapid rise in yields that has wiped out more than a decade’s worth of gains. The Fed’s aggressive tightening of monetary policy has been one of the biggest drivers of that rise.

The yield curve, or the difference between the two-year and 10-year Treasury yields, is inverted, meaning that long-term yields are higher than short-term yields. This is a clear warning sign that a recession could be coming, but it’s difficult to determine how soon.

In the meantime, the Fed will have to decide if it has the patience to let the economy return to its 2% inflation target or if it wants to push long-term rates higher in an effort to keep the economy growing. The decision will affect the markets for a few months, but will be a necessary move in order to get inflation under control and prevent the economy from falling into a recession.