Today's CPI report was bang in-line with estimates so that gives the Fed breathing room to wait and see what happens with prices. What's complicating that is the spike in crude oil due to the Iran war. WTI continues to bounce around and is up $1.52 to $84.90 today after rising as high as $89.
The interaction with oil, inflation and growth is top-of-mine for bond investors at the moment. Against that is the bid for safety in a world of tariffs and unprovoked US attacks. US 10-year yields are up 5 bps to 4.19%.
That rise isn't hurting stock markets as the S&P 500 is now positive, led by a 12% rally in Oracle shares following earnings.
Looking at the chart, 10-year yields hit 4.216% on Monday as oil prices peaked. They fell below 4.10% yesterday but are back on the march higher. Two of the things at issue, are how long the Iran war will last and how long the Strait of Hormuz will remain effectively closed. A ship was struck travelling through today.
With the rise in yields, the US dollar is stronger today, particularly against the yen. USD/JPY is up 52 pips to 158.54 and approaching some of the levels that triggered the rate check in the pair last month.
I don't think borrowing costs will be a particular problem until/unless the 10-year breaks 4.30%, which was the high for the year set in late January. Above that takes us to August of 2025.
More important may be Fed signaling about what it will do next on rates. There is little chance of a cut from Powell in March or April but Warsh will take over in June and the market sees a 39% chance of a cut then. He is going to have to walk a fine line during his confirmation because Trump will insist he sounds dovish or he may pull the nomination, despite that jump in oil prices. That could change once he's locked into the position.
For the year, the market is pricing in 33 bps in easing.
