Investors faced a sharp rise in U.S. Treasury yields on Wednesday following a hotter-than-anticipated January consumer inflation report. The consumer price index (CPI) increased by 0.5% for the month, marking a 3.0% rise over the past 12 months. This development exceeded economists' predictions, which had anticipated core price increases of 0.3% in January and 3.1% year over year.
The unexpected inflation figures pushed the 10-year Treasury yield up by nine basis points to 4.627%, while the 2-year Treasury yield rose more than seven basis points to 4.363%. The surge in yields reflects investors' reactions to mounting inflationary pressures.
Core CPI, excluding volatile food and energy prices, also surpassed expectations with a 0.4% increase for January and a 3.3% rise over the past year. Economists surveyed by Dow Jones had forecasted a monthly rise of 0.3% and a 2.9% increase year over year.
"Today's stronger than expected CPI release is likely to further cement the FOMC's cautious approach to easing," said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions within Goldman Sachs Asset Management.
In response to the economic data, U.S. President Donald Trump signed an order on Monday imposing a 25% duty on steel and aluminum imports, adding another layer of complexity to the economic landscape.
The Federal Open Market Committee (FOMC) chose to keep interest rates unchanged last month, as Fed Chairman Jerome Powell emphasized a measured approach to monetary policy adjustments.
"We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment," Powell stated.
Powell is scheduled to address the House Financial Services Committee on Wednesday, where he is expected to discuss the impact of the recent inflation data on future policy decisions. The hot inflation report may lead to expectations of delaying further interest rate cuts by the Federal Reserve.
Looking ahead, investors are also anticipating the release of the producer price index on Thursday, which could provide additional insights into inflationary trends and their potential implications for monetary policy.