Bond Traders Eye Key US Inflation Report to Game Out Next Bets

This week, the US bond market faces its own Super Tuesday of sorts: the release of fresh inflation data investors will use to predict when the Federal Reserve will start cutting interest rates.

Following a somewhat mixed jobs report on Friday, investors see the upcoming February Consumer Price Index report, or CPI, as crucial to deciding whether to add to bullish Treasury wagers. Swaps traders see an interest-rate reduction beginning in June as a virtual lock, with nearly four quarter-point cuts expected over the coming year.

The figures will provide a key check on whether inflation is coming down steadily enough to allow the Fed to start easing policy as soon as traders currently expect. A stronger-than-anticipated jump in consumer prices could derail the bond market’s recent rally, which has been fueled by confidence that the Fed is on the verge of pulling inflation back to its target.

That was the case last month, when the CPI triggered a market selloff. The impact may be stronger this time because it’s the last major piece of economic data before the Fed’s March 20 meeting. And Fed officials won’t be providing any guidance, given the traditional pre-meeting blackout on public remarks.

Because of this, the shape of Fed policy to come hinges largely on Tuesday’s data.

“It’s really going to be what the monthly inflation prints are,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.