- In March, the U.S. CPI rose by 0.9% month-on-month and 3.3% year-on-year, which is in line with expectations. Core CPI increased by only 0.2% month-on-month and 2.6% year-on-year, indicating that the current round of reflation is mainly driven by energy and external supply shocks.
- The U.S. Treasury's curve published on April 10 shows that the yields on 2-year, 10-year, and 30-year Treasury bonds are approximately 3.81%, 4.31%, and 4.91%, respectively. The 2s10s maintains a positive slope of about 50 basis points, and there has been no disorderly surge at the long end.
- The true marginal pricing force in the market is not a single CPI reading but rather the negotiations related to Iran and the supply risk of the Strait of Hormuz. As of April 13, the failure of the talks has pushed oil prices back above $100 per barrel.
Inflation Readings
The significance of March's CPI lies in confirming that "oil price shocks have entered the total demand-side price system," but have not caused broader core service inflation to spiral out of control. BLS data shows that the headline CPI's monthly rate of 0.9% marks the largest increase in nearly four years, while core inflation remains significantly lower than headline. This has led to an initially restrained reaction in the bond market: the data wasn't worse than the market imagined, it merely postponed the timing for rate cuts.
Yield Curve
The decline and subsequent rise in yields reflect not an "inflation surprise" but a "rebuilding of risk premiums." The official curve shows the 10-year yield around 4.31% and the 30-year near 4.91%, with the 2-year around 3.81%. This indicates that the market acknowledges the difficulty in relaxing policy rates in the short term, yet still believes that medium-term growth will be hindered by energy and geopolitical shocks. The curve maintains a positive slope but has not significantly steepened.
Iran Variable
On April 10, the market's focus was on whether the weekend talks in Islamabad could begin and Iran's preconditions for asset unfreezing and a ceasefire in Lebanon. By April 13, this variable had been falsified; with the talks breaking down, the U.S. moved forward with the blockade of Iranian ports, pushing Brent crude briefly to around $102, prompting the bond market to again trade "longer-term high oil prices."
Fed's Position
San Francisco Fed President Daly provided a pricing anchor for the market: the policy is already restrictive enough to reduce inflation, but the oil price shock caused by the Iran conflict will lengthen the time to reach the 2% target. This implies that the Fed is more likely to maintain an observation window rather than immediately alter its framework due to a single month's headline rebound; if high oil prices persist, the threshold for easing this year will continue to rise.
