Today’s CPI print came in slightly, very slightly, hotter than the street’s published expectations. Core CPI y/y came in at 3.8% vs 3.7% forecast and Headline CPI came in at 3.2% vs. 3.1% forecast. Equity markets sold off immediately as the news crossed the tape but quickly rebounded to new overnight highs. There is a ton of focus on the dynamics of OER (Owners Equivalent Rent). OER came in higher than expected. This metric has lagged the downturn in new rents which have weakened significantly. On the other hand, this metric also lagged to the upside when rents were surging. The rebound in futures is telling us that broadly speaking, traders are assuming that OER will fall to reflect new rents over time and therefore, a higher CPI print driven by OER should be dismissed.

Our overall take is that the inflation indexes are simply not falling in the way that the market and the Fed expected. If they were, we would still be pricing in seven cuts this year instead of 3-4. Optimism and momentum reign, so we probably needed to see a much scarier reading of both the headline numbers and the subcomponents to bring some doubt into the market.

Later today, we will have a 10yr Treasury auction that will give us an indication of the market’s appetite for duration. In other words, we will see more tangible evidence of long-term inflation concerns or lack thereof.

Our mantra over the past couple months has been “Sideways is Fine”. In other words, even with uneven/flattish corporate earnings growth, sluggish real economic growth at around 2%, and inflation flattening out above 3%, that is good enough for the passive flows and retail optimism to keep the markets levitating higher. Our concern is that there will come a day when the market comes to the epiphany that inflation really isn’t transitory and that we are in a new world defined by secularly tight labor, tariffs, isolationism and commodity volatility all of which beget higher long-term rates, higher cost of capital and slower growth.

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