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Consumer Price Index surprise, continued

The dogs that didn’t bark were the US dollar, virtually unchanged after the number, and the real (inflation-adjusted) US 10-year yield, which is slight down. The inflation component of the 10-year yield rose by about 4 basis points, a very measured response. But the real yield is the important one for the US economy, and also the most important gauge of market expectations about central bank policy.

If the market believed that the CPI surprise represented a trend rather than a blip, it would bid up real yields, expecting the Federal Reserve to raise interest rates in the future (expectations about the future federal funds rate are the big near-term determinant of real yields).

As the intraday chart makes clear, that was the market’s first response to the CPI number: the 10-year TIPS yield jumbed from 0.76 to 0.80 in the first 10 minutes after the number appeared. Then it fell back to exactly where it had been before the announcement. Presumably bond traders looked at the same numbers that Asia Unhedged looked at, and concluded that the price fluctuations of clothing during after-Christmas sales would not determine the policy of the world’s most important central bank.

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Stocks head south after US CPI comes in higher than expected

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