CPI Update : Have Interest Rates Peaked?

[Tyler Solomon]

Some good news out this morning with a soft CPI print, much under where consensus was. Capital markets a reacting strongly to this in todays session, expecting a decent move in the 10 year. Still have FED’s Jerome Powell Speaking later this week, his words / forward looking statements will be very important for how capital and secondary capital markets digest interest rates moving forward. 

While I do not see this a reason for an all out Pivot from the FED at this point, nor do I see rate cuts anywhere in the next few quarters, 2 consecutive months of MOM inflation data leveling out / decreasing, and the smallest YoY increase since the period ending December 2021, it has me thinking... Have Rates Topped?

My Logic:
Inflation is a lagging indicator as many FED speakers have noted, with some recently expressing caution about overtightening fears over the next few months. As inflation begins to subside, I believe we will see a lot more "soft landing" verbiage from the FED in the coming meetings, should the current trend continue. This would meaning a slowing in rate hikes, or at the minimum, smaller and less substantial rate hikes, and a potentially lower terminal rate than what is currently expected - eventually leading us to a period of relatively steady interest rates.  Furthermore,  2/10 year spreads have are drastically bloated with a lot of room to compress in them as well. If markets continue to recover, inflation remains cool, and spreads begin to compress, this will effectively "eat up" any of the smaller, less menial hikes as the fed begins to shift it's narrative, and could even help in bringing mortgage rates down if spreads continue to compress as rates level out.

Just my 2 cents, please share, respond, and tell me why I might be wrong!