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So why was this so important today? So important that the yield on the 10-year Treasury rose another 3 basis points to 4.58%.

The Producer Price Index for final demand rose 0.2% in March, seasonally adjusted, the Bureau of Labor Statistics reported today. Final demand prices moved up 0.6% in February and 0.4% in January. On an unadjusted basis, the index for final demand increased 2.1% for the 12 months ended in March, the largest advance since rising 2.3% for the 12 months ended April 2023.

The March increase in the index for final demand is attributable to a 0.3% rise in prices for final demand services. In contrast, the index for final demand goods edged down 0.1%.

It’s that last set of numbers that you should get your attention. The Federal Reserve has increasingly focused its worries about inflation on the increase in the prices of services. While the prices of goods continue to fall–showing a continued drop in inflation for goods–the price of services has continued to rise. And that has led to Fed concern that inflation as a whole remains stubbornly high and that the overall inflation rate isn’t likely to fall to the Fed’s target of 2% in the near future.

In recent months the Fed has focused on something called “super-core” inflation that measures inflation for service excluding shelter. (This a roughly equivalent to the general “core” inflation rate that excludes price for energy and food.)

The problem, for the Fed is that the “super-core” rate now looks to be moving higher again. Services inflation, even after subtracting housing prices with all their statistical noise, isn’t falling, and instead has been climbing for the last three months.

The worries increase if you look at the “stickiness index” kept by the Atlanta Fed. This index, which tracks those prices that show the most reluctance to moving downward, shows the drop in inflation beginning to reverse at an inflation level of near 4%.

The CME FedWatch Tool reflects these worries. Today, April 11, prices in the Fed Funds Futures market work out to 77.4% odds that the Fed won’t cut interest rates at its June 12 meeting. A week ago, on April 4, the odds of “no cut” by the Fed were just 34.2%.

The odds for “no cut” at the July 31 meeting have also moved up strongly to 51.8% today from just 19.3% on April 4.

I think we can expect more bond market volatility in the coming days and weeks. It looks like a substantial amount of money in the market is positioning itself to short 2-year and 10-year Treasuries on the possibility that the 10-year yield will climb to 5% or more on the increasing sentient that the Fed won’t cut at all in 2024. Today Bloomberg reported that Schroders is shorting U.S. bonds, and that bond giant Pacific Investment Management Co. (PIMCO) expects the Fed to ease policy at a more gradual pace than peers in other developed markets, with a “non-negligible” chance that it doesn’t cut at all this year.

Quite a shift from the beginning of 2024 when you could hear talk of 6 interest rate cuts in 2024.

Which should be a reminder that in times of true uncertainty about Fed policy like now, the bond market moves to extremes on both the bullish and bearish ends. Today Treasuries suffered their biggest one-day loss since August 2022. I think it’s unlikely that the Fed will raise interest rates in 2024, but an increased fear of that scenario is likely to push yields higher from here. If we get to 5% yields on the 10-yea Treasury, I would certainly be a buyer.

The Fed calendar–with no economic projections (the Dot Plot) after the June meeting until the September 18 meeting certainly gives bearish bond market sentiment room to run. I’m looking for higher yields for a while in the bond market–which would itself give the Fed less reason to raise interest rates–but I don’t expect to see them stick north of 5% on the 10-year Treasury.

After this week’s CPI and PPI inflation reports, I’d shift my expectations–say 75% odds–for an interest rate from the July meeting to the September 18 meeting. The likelihood is that a September cut will be the only cut in 2024. I’d put odds of “no cut” at all in 2024 at about 25%. Not insignificant certainly.