Rates Are Officially Breaking The Rules, But Why?

This was supposed to be the week where a key inflation report would cast a vote on the fate of interest rate momentum. The vote was ostensibly friendly but rates surged higher anyway. What gives? First off, let’s revisit why rates would care so much about an inflation report.  CPI (the Consumer Price Index) is the biggest monthly report on inflation in the US.  Inflation is the key reason that rates are as high as they are.  If inflation falls back to target levels, rates would theoretically move lower in concert.   Last month’s CPI was good for rates because it came in below the consensus (the median forecast among multiple economists). It was also a noticeable departure from a highly indecisive trend at elevated levels that, until then, had simply refused to decide whether it would move higher or lower. As seen in the chart above, the indecisive trend resolved toward lower levels last month with core inflation falling to 0.16%. It matched that same level in the new data released this week.  If this were the only thing that mattered to interest rates, rates would be much lower than they are today.  Alas, rates found other things to worry about.  The following chart of 10yr Treasury yields serves as a benchmark for this week’s rate movement (starting with last Friday’s jobs report). If we take the 10yr yield’s word for it, rates are thinking less about inflation and more about other things.  Part of the reason is that inflation still has to prove it can maintain this trajectory.  Annual numbers remain far from target levels, especially at the core level.
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