US: CPI focus and rates reaction – TD Securities

TD Securities’ Global Strategy Team highlights that recent geopolitical tensions and a weaker 3-year auction pushed US rates higher, with attention now turning to February CPI. The bank expects core CPI to slow slightly month-on-month while remaining steady year-on-year, and sees asymmetric market reactions to surprises, with upside inflation risks if services disinflation underperforms.

CPI outlook and market reaction setup

"Rates moved higher on Tuesday following after news of Iranian mines being deployed into the Strait of Hormuz and that the US military had not escorted any oil tankers through the Strait yet. The 3y auction tailed in the afternoon by 1.1bp, with the lowest end-user takedown since the week following Liberation Day."

"On Wednesday, CPI will grab focus where we expect the print to come in near-consensus. We would expect markets to react asymmetrically, with a weaker print being ignored due to the recent oil shock, and a stronger print drawing focus to more inflation concerns excluding the conflict in Iran. The 10y reopening will also be watched for demand following Tuesday's weaker 3y auction."

"We look for core inflation to slow to 0.23% m/m in February, with the headline CPI posting a slightly firmer 0.25% gain. A slower rise in services prices along with more modest tariff pass-through should help keep the core segment under control."

"We project the core CPI stayed unchanged at 2.5% on a y/y basis; likewise for the total measure which likely moved sideways to 2.4%. We see the risks to our forecasts skewed to the upside in the event our assumption for services disinflation does not fully materialize."

"Our CPI NSA forecast at 326.762 is a whisker above the market's current fixing at 326.740."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)