We knew there was a lot riding on today’s CPI data and that it was highly likely to inspire a big move higher or lower for bonds if it came in much higher or lower than expected.  In today’s unfortunate case, core CPI surged to 0.6% vs forecasts calling for 0.3% and a previous reading of 0.3%.  This is the sort of surge that very few economists predicted (obviously… the median was 0.3% after all). 

Markets were priced for 0.3% and are thus quickly adjusting to the new inflation reality as well as fears surrounding a Fed announcement next week that will certainly be even more hawkish than it otherwise would have been.  Translation: bonds are tanking, quickly (stocks too, for that matter).

Why are stocks and bonds tanking symmetrically?  This is just the classic Fed accommodation trade.  In other words, hotter CPI instantly upgraded the odds of higher Fed rate hikes with a small increase to next week’s outlook (10bps) and larger increases to the hikes by the end of the year and/or middle of next year (25bps).  

As for the bigger picture, between yesterday afternoon’s bond market weakness and this morning’s sell-off, the exact same trendline we’ve been following remains a perfect floor for the rising rate momentum.  
Source: Mortgage News Daily