Like every other monthly inflation update out of the world’s largest economy, Tuesday’s US CPI report was billed as “all-important.”

Headed in, “whispers” about an upside surprise and rampant speculation about the potential for a core beat to amplify the hawkish policy read-through from a spate of hot US macro data had market participants on edge.

My initial assessment was that the figures, while hardly encouraging, didn’t necessarily live up to the billing. The curve appeared to settle on a bear flattener around an hour and a half after the data hit, but there wasn’t much to suggest traders viewed the numbers as a real game-changer.

Fed-dated OIS showed almost no change in pricing for the March meeting (so, no inclination to speculate on a half-point escalation from the Fed next month). Nevertheless, we’re a long way from where things stood prior to the February policy gathering.

Pricing for easing in the back half of the year was cut (no pun intended) in half during last week’s hawkish repricing. The updated figure above shows the extent of the recent buy-in for the Fed’s “higher for longer” narrative.

Terminal rate pricing moved up on Tuesday, but it’s more instructive to note that any increase paled in comparison to the dramatic rethink observed in the wake of the January jobs report.

Suffice to say payrolls had a much bigger impact than CPI, commensurate with the magnitude of the NFP beat, and the extent to which wage growth is now seen as the primary determinant for the future trajectory of services sector inflation.

Tuesday did see more SOFR options flow hedging the possibility of Fed funds reaching 6%. The activity, centered on the December tenor, also made a cameo on Monday.

If core CPI continues to print at 0.4% (or greater) on a MoM basis, inflation will remain elevated, and thus the odds of a real Fed pivot (i.e., to outright easing) will be remote. Participants in the February vintage of BofA’s Global Fund Manager survey cited “higher for longer” inflation as the biggest tail risk.

And yet, hardly any poll respondents expected hikes to continue beyond the June meeting.

I’ll leave you with some analyst excerpts and other color from CPI day in the US,

The FOMC has shifted its focus to labor market tightness and its impact on core services inflation, especially for core services excl. housing (so excluding primary rent plus OER and not excluding shelter). Regarding the latter, this inflation gauge gives an incomplete view, as the Fed focuses on the PCE version of it, which is a more dominant driver for core inflation trends (56% versus 30% in case of CPI) and measures its dominant components differently, such as medical care services, making it less volatile than its CPI equivalent. Nonetheless, in terms of the CPI, core services excl. housing inflation has eased somewhat over the month but remains elevated. In the end, today’s report continues the theme of strong core services inflation acting as a brake on disinflation. Give the persistence in elevated core services inflation and a hot labor market there is no reason why the Fed should abandon its tightening stance. We continue to project two more 25bps rate hikes at the March and May FOMC meetings [but] as underlying inflationary pressures remain very much elevated, we do see a sizable upside risk to our terminal rate projection with the Fed needing to engage in additional tightening beyond the May meeting.— Oscar Munoz and Jan Groen, TD

Is US inflation transitory after all? US core CPI excluding the discredited shelter component rose 0.2% in January (4% YoY) following rises of only 0.1% in each of the previous three months. The three-month annualized rise is only 1.4%, following core PPI disinflation path. — Albert Edwards, SocGen

We continue to track above the 0.17% MoM increases that over time would get us to the 2% target and with the unemployment rate at 50+ year lows the Fed will continue to hike rates [in] March and potentially also May. We remain optimistic that inflation can get close to 2% late in 2023, largely through flat to lower prices for shelter and a squeeze on corporate profit margins. — James Knightley, ING

If transport continues to contribute positively, it will reinforce the trend from rising shelter (expected to be bolstered further by a methodology change to correct undersampling of single-family rentals) –- likely leading to a reversal in the overall disinflationary trend. — Simon White, Bloomberg

We’ll credit the kneejerk bullish reversal to the the fact it wasn’t a “strong” 0.4%. On net, it was a fairly as-expected print that underwhelmed the “whisper” of a stronger core read, but the still-high outright level of inflation combined with the state of the labor market should add credence to the ongoing tightening (and no 2023 cuts) narrative. — Ben Jeffery, BMO

Why did God create economists? To make meteorologists feel good about themselves. All January data skewed by balmy weather — a 1.5 SD event! — David Rosenberg