US | Treasury yields price in the “last mile is the hardest” narrative

Summary

Doors seem to have closed to the possibility of a rate cut in March. Fed’s need for “more good data” to achieve “greater confidence” of the ongoing disinflation process has been recently supported by recent strong job creation data and signals of sticky core CPI services inflation.

Key points

• Key points:
• Markets seem to be overreacting to January's core CPI figure, which was fueled by a puzzling 0.6% MoM rise in owner equivalent rents despite continued evidence from core PCE prices disinflation.
• This was reflected in a notable upward shift of the yield curve, which however remains well below its late-2023 maximums, when the 10-year Treasury yield touched 5%.
• The term premium rose again amid renewed doubts on the timing and speed of this year’s easing cycle, but further evidence of core PCE prices disinflation will likely bring it back down.
• Expectations for rate cuts this year experienced a notable shift this month as they moved from anticipating 150bp worth of rate cuts closer to December’s Fed projections of three 25bp rate cuts.
• Further disinflation signals and December Fed’s dovish shift drove professional forecasters to step back from their previous belief of a 10-year Treasury yield above 4% throughout 2024.

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