February 2025 CPI Preview
Don't get too egg-static over stagflation risk & steepeners offer limited upside
February’s CPI readings are expected to show more modest price growth of 0.3% month-over-month for both headline and core measures, while year-over-year growth is expected to slow to 2.9% and 3.2%, respectively. Relative to last month, we view January’s hotter than expected inflation as a one-time seasonal effect (similar to what we have seen in prior Januarys post-2020). For February’s CPI, we do not expect one-off factors to carry over and introduce an upside risk. Overall, there is likely downside risk (or at least only a rounded up 0.3% reading).
The issue is, given market pricing, rates have moved too much while at the same time are feeling a bit exhausted (with higher lows forming on yield charts). We expect any reading higher than 0.3%/0.3% to be met with some selling pressure for USTs. Additionally, directional risk is not symmetrical in our view, where if inflation comes in meaningfully softer (at ~0.2%), a rates rally will likely be limited given positioning has likely been cleaned up. Thus, we’re neutral duration and see limited curve steepening upside as 2s have likely moved too far too fast.
