The "hot" CPI in the United States reignites inflation concerns, and the market reduces this year's interest rate cut expectations to only 1 time

Zhitong Finance has learned that due to U.S. inflation exceeding expectations, bond traders have pushed back bets on the Federal Reserve's next rate cut to December. Swap contracts related to the Fed's future decisions were repriced after the U.S. January CPI rose more than analysts expected. Previously, the market anticipated that the Fed would cut rates before September. The new interest rate level indicates only a 25 basis point cut this year. U.S. Treasury prices plummeted, with yields on U.S. Treasuries of all maturities rising by at least 8 basis points. The market had previously predicted a higher likelihood of a rate cut in June and possibly another cut before the end of the year, but this expectation has now been significantly delayed.

The benchmark 10-year U.S. Treasury yield rose by 12 basis points to 4.66%. The 2-year U.S. Treasury yield, which is more sensitive to Fed rate adjustments than long-term bonds, briefly rose by 10 basis points to 4.38%, before retreating to around 4.36%.

Roger Landucci, a partner at Alphamatrix Finance, stated, "In the face of such significant inflation pressure, who can prove that a rate cut is justified?" Fed policymakers paused rate cuts at the January meeting after three cuts at the end of last year. Fed Chairman Jerome Powell testified before Congress on Wednesday, stating that data shows the Fed has "not fully achieved" its inflation goals, despite progress toward the 2% target.

Anastasia Amoroso, chief investment strategist at iCapital, stated before releasing a report that the Fed has "shifted from focusing on the labor market to focusing on inflation, which was a concerning issue at the end of last year."

The U.S. January unadjusted CPI rose 3% year-on-year, the largest increase since June 2024. The U.S. January seasonally adjusted CPI rose 0.5% month-on-month, the largest increase since August 2023. The U.S. January seasonally adjusted core CPI rose 0.4% month-on-month, the largest increase since March 2024. The U.S. Bureau of Labor Statistics (BLS) stated that nearly 30% of this increase was due to rising housing costs.

Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, stated, "The CPI data is clearly in a warm moderate range. The current data is simply not cooperating with the Fed." LeBas pointed out that some inflation pressures may be temporary, and institutions indicated that the unexpected rise in January CPI data could stem from seasonal adjustment processes. Nevertheless, traders remain unconvinced.

Bloomberg strategist Simon White stated, "The broadly higher-than-expected CPI data led to a surge in yields and a drop in the stock market. Like in 2020 and 2021, funds flowing into inflation-linked bond ETFs have been increasing. Most importantly, shorts have been covered. Expectations for rate cuts this year are weakening, and currently, a rate cut is being priced in with difficulty Nevertheless, the likelihood of interest rate hikes this year remains low, at about 15%, and there has been no substantial increase since the data was released."

Analysis indicates that part of the reason for the CPI increase in January may be due to companies pushing prices up at the beginning of the year, as well as anticipations of a comprehensive increase in tariffs on imported goods leading to preemptive price hikes. Furthermore, Wednesday's report further confirms that the inflation process faces the risk of reversal—coupled with a solid labor market, the Federal Reserve is likely to maintain interest rates unchanged in the foreseeable future. Policymakers are also waiting for further clarification on President Trump's policies, especially regarding tariffs, which have already led to an increase in consumer inflation expectations.

James Knightley, Chief International Economist at ING Group, stated: "This CPI report undoubtedly shows that inflation remains high, and with potential trade tariffs being implemented, it will be difficult for the Federal Reserve to justify a rate cut in the short term." Other analysts on Wall Street expressed similar views.

Brian Coulton, Chief Economist at Fitch Ratings, remarked: "It almost looks like a replay of the first half of 2024, when the rise in inflation surprised everyone, including the Federal Reserve. This also indicates that as new inflation risks begin to emerge, the Federal Reserve has not yet completed its work in bringing inflation down. New inflation risks include tariff increases and a squeeze on labor supply growth."

Economists at Bank of America, including Aditya Bhave, stated that this report strengthens their confidence that the Federal Reserve's rate-cutting cycle has ended. "Now, rate hikes seem less inconceivable," they wrote in a report following the data release.

As this data comes out, it is a critical moment for Federal Reserve officials and the U.S. Treasury market. Earlier this week, Federal Reserve Chairman Powell told a U.S. Senate committee that given the resilience of the economy, the Federal Reserve does not need to rush to cut rates. However, President Trump stated earlier on Wednesday in a post on Truth Social that rates should be lowered.

Investors are also keeping an eye on a large number of new bond issuances. The U.S. Treasury auctioned $42 billion in 10-year bonds on Wednesday, with a coupon rate at the highest level since 2007, and will auction $25 billion in 30-year bonds on Thursday. The $58 billion in three-year bonds auctioned on Tuesday saw strong demand.

The sell-off pushed up the expected coupon rate of the 10-year U.S. Treasury bonds. Before the CPI data was released, the indicative yield before the bidding deadline was around 4.52%, at which level the coupon rate was 4.5%. Based on Wednesday's peak of 4.65%, the coupon rate for this auction was 4.625%, the highest level since 2007.

James Athey, a portfolio manager at Marlborough Investment Management, stated that the warming of January's inflation data favors holding bonds from countries like Australia and New Zealand while avoiding U.S. bonds Athey stated in an interview: "The uncertainty is too high to hold a significant position in U.S. Treasuries." He referred to the U.S. economy, fiscal policy, and monetary policy. He said that, at the same time, "unless there is more severe inflation" prompting the Federal Reserve to consider raising interest rates, the rise in yields may be limited.

Bill Adams, chief economist at Comerica Bank, noted in his analysis: "The Federal Reserve views the strong inflation data from January as evidence that price pressures continue to build beneath the surface of the economy, which will strengthen its tendency to slow down or even completely halt interest rate cuts in 2025."