US yields have retreated from their highs. However, today's CPI numbers might reignite the selloff. Core CPI is expected to decrease from 0.4% MoM to 0.3%, and the yearly figure to 5% from 5.3%. A surprise on the upside might push the market to price an aggressive Federal Reserve, forcing bond futures to envision a second rate hike, as shown by the dot plot.
However, lower-than-expected inflation, particularly a monthly core CPI of 0.2%, might lead the market the other way, believing that the Fed might not need to tighten the economy any longer, decreasing the chances of another rate hike.
In this piece, we are going to look at US Treasury yields to understand what is going to be their likely move.
The yield curve is telling us we are at a pivotal point
The spread between 30- and 5-year yields formed a triple bottom and reversal pattern. Technical analysis tells us that the yield curve is likely to steepen, with long-term yields rising or dropping faster than the belly of the curve. This move is likely if CPI numbers meet expectations or surprise on the downside, showing that we might be at the end of the tightening cycle.
However, if the 5s30s spread breaks below resistance at -46bps, the move can be significant, flatting further the yield curve. That could happen if today's CPI numbers surprise on the upside showing that the Fed might need to tighten the economy further, risking a recession.