US: Inflation risks and rangebound yields – TD Securities

TD Securities’ Oscar Munoz and colleagues note that February US CPI matched expectations, with core inflation easing and supercore moderating after January’s tariff-driven spike. They project firmer core PCE, see upcoming Oil-driven energy gains lifting headline inflation toward 3%, and expect the Fed to stay patient while US Treasury yields trade in a 4.0–4.3% range.

CPI, PCE and Treasury range guidance

"In line with our expectations, tariff pass-through moderated today after a hot January, with the CPI's supercore falling from 0.59% m/m to 0.35% in February. We expect this signal to largely translate into the more relevant PCE supercore, which we project at 0.28% for February. Our preliminary core PCE inflation forecast, however, is firmer at 0.31% m/m."

"All told, the market is likely to look through today's report as it is backward looking in the face of the ongoing oil shock that will impact upcoming data. We expect the Fed to be patient as developments in the Middle East remain in flux. For now, the March CPI report is likely to produce a notable increase in energy prices, bringing y/y inflation closer to the 3% handle."

"As we wait on more clarity from the Fed, rates are likely to remain within recent ranges until H2 this year, with 10y rates likely hovering between 4.0-4.3% despite briefly breaking out of the range leading into the strikes in Iran. We favor buying dips in nominal and real rates when approaching the top of this range, however we expect real rates to outperform nominals on concerns that inflation could be more persistent."

"Energy inflation was strong due to increasing gasoline prices. We expect this to move significantly higher in March after oil prices spiked due to the Iran conflict."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)