Treasury Action: bonds are little changed awaiting the January CPI report
Treasury Action: bonds are little changed awaiting the January CPI report. The 10-year yield is modestly lower at 2.846%. The 10-year breakeven is steady at 206 bps, but is down from 214 bps from February 2 (jobs report), which was the widest since the summer of 2014. While analysts see inflation firming this year, analysts believe the market over-reacted to the average hourly earnings strength in the January jobs report. Analysts're forecasting a tame 0.1% increase in the core (median 0.2%), alongside a firmer headline gain of 0.3% (median 0.3%). The markets are looking for indications whether the strength in the 2.9% y/y rise in average hourly earnings was a one-off or a harbinger of a firming trend in inflation. Note that CPI revisions bumped up the December headline to a0.3% clip from 0.2%, but knocked down the core to 0.2% from 0.3%. Risks to our forecasts are to the high side given the strength in oil and other commodities last month. However, favorable base effects should damp the y/y core rate, and leave it at 1.7% y/y, versus December's 1.8% y/y pace. Given the sell-off in bonds since the February 2 jobs report and the general angst in the market over a more aggressive Fed tightening path, analysts suspect a tame core CPI reading will see yields tumble.