Photographer: Scott McIntyre/Bloomberg

CPI Looms Even Larger for Bond Market After Yellen Testimony

  • June data to be released Friday follows three-month slowdown
  • Fed views deceleration as transitory; investors await evidence

The stakes have gotten even higher for U.S. inflation data set to be released Friday.

Always important to bond investors, inflation -- or the lack of it -- has become even more critical as the U.S. economy nears full employment, leaving price appreciation as the primary driver of monetary policy. In raising interest rates four weeks ago, the Federal Reserve brushed off three months of decelerating consumer price gains as “transitory,” saying they expect improvements in the labor market to soon boost prices. Yet traders are now questioning officials’ resolve to keep tightening if inflation continues to run below their 2 percent target.

The inflation data now “play a bigger part in driving the bus for Fed communication,” said Kit Juckes, a strategist at Societe Generale SA. “And a lot of it now for the bond market is about inflation. If we trundle along with the current level of inflation the Fed won’t stop slowly raising rates, but they won’t be in any hurry.”

The Treasury market rallied on Wednesday after Fed Chair Janet Yellen, in congressional testimony, appeared to express deeper concerns over how persistent weak inflation may prove. She listed “uncertainty about when -- and how much -- inflation will respond to tightening resource utilization” as the first of several risks attending the economic outlook.

CPI inflation slowed from 2.7 percent in February, the highest level in nearly five years, to 1.9 percent in May. It’s expected to fall to 1.7 percent in June, the median forecast of economists surveyed by Bloomberg. The core CPI, which excludes food and energy prices, fell to 1.7 percent from 2.2 percent over the same period and is forecast to hold steady.

The Fed’s preferred inflation gauge, the price index for core personal consumption expenditures, declined to 1.4 percent in May from 1.8 percent in February.

Weak CPI data for May released on June 14 marked the last time the Treasury market “went vertical,” FTN strategist Jim Vogel said in a note Thursday. The 10-year note yield traded at its lowest level this year that day. Yellen’s comments this week suggest that June CPI “will move the market.”

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