Can the Bond Market's Message Get Any Clearer?

The divide between the Federal Reserve and the bond market is getting wider by the day. Policy makers discount the recent weakening trend in inflation as fleeting, expecting the tight labor market will soon unleash animal spirits among consumers in the form of spending. “It’s important not to overreact to a few readings, and data on inflation can be noisy,” Fed Chair Janet Yellen told reporters yesterday after the central bank boosted interest rates.

Bond traders say not so fast. The big rally in the fixed-income markets that has pushed yields on 10-year Treasury notes all the way down to as low as 2.10 percent on Wednesday from 2.63 percent in March suggests traders believe the slowdown in inflation is more than transitory, overwhelming the Fed’s confidence in stronger growth and labor markets. It’s as if the market is trying to force the central bank to back off its hawkish stance. The consumer price index data earlier in the day was particularly meaningful for traders, as the core reading came in 0.1 percentage point below forecasts, the third miss in a row for that crucial data series. The retail sales data released at the same time was also shockingly weak.