Highest Inflation Since The 80s; Highest Rates Since 2019; Huge Volatility on Friday

There were 3 distinct parts to this week. The first part consisted of the entirety of the first 3 days.  Rates didn’t move much as the market continued to digest the big spike seen at the end of last week. In part 2, things got crazy –relatively.  The week’s biggest economic data–the Consumer Price Index (CPI)–was released, and chaos ensued.  CPI is one of the two most important broad inflation metrics, and inflation is one of the most important considerations for financial markets right now due to its implications for the rapidly evolving Fed policy outlook.   The median forecast among economists called for a fairly big increase to CPI with the more important “core” component (which excludes food and energy) rising from 5.5% to 5.9% in January.  Traders felt this number was a bit too high, and were hoping to see something under 5.9%.  That likely would have allayed fears that the Fed would hike rates by 0.50% in March as it finally moves up from the 0.00-0.25 lower boundary.   CPI did not come in under 5.9%.  It actually came in 0.1% higher at 6.0–the highest number in decades. Following the data, Fed Funds Futures for April (the market’s way of betting on Fed rate hikes) quickly moved to price in a 0.50% hike.  The probability increased to over 90% from roughly 50% the day before.
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