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On Tuesday, World stock market indexes dropped like hot potatoes, the U.S. dollar surged to three-month peaks, and Treasury yields climbed the ladder after consumer prices in the U.S. came in at a much brisker-than-expected rate in January. The harsh data set surprised many investors, serving as a stark reminder of the persistent inflationary pressures in the economy. This came as a bitter pill for those who may have interpreted the relatively benign annual inflation revisions released last week as something akin to an all-clear.

The contrast between the recent revisions and the current data underscored the ongoing challenges investors face interpreting fact from fiction in the data landscape, prompting a vicious reassessment of the forward market and policy expectations.

The recent CPI update poses concerns for those advocating for a soft landing scenario. It suggests the economy's robust spending, hiring, and positive consumer sentiment contribute to sustained price pressures. It aligns with the narrative that inflationary forces are not diminishing as quickly as some had hoped. Consequently, investors find themselves unable to rely on the familiar reassurance of attributing last month's inflation spike to a one-off, isolated event, leading to heightened uncertainty about the trajectory of monetary policy.

You can forget about a March rate cut; there's no chance of that now. However, suppose the other top-tier data released this month shows a hotter trend similar to the Consumer Price Index (CPI) report. In that case, it's unlikely that the Federal Reserve will cut interest rates in May.

The report is incontrovertibly disappointing overall for doves, as the dreaded top-side beat will embolden the Fed to signal that it is in no hurry to cut interest rates, especially with the swap markets now closely aligning with the Fed's three-cut policy projections.

Indeed, implied easing for the year dipped below 100 basis points, marking a decrease of 75 from the previous high-water mark. This places the probability of less than one quarter-point cut away from aligning with the December dot plot projections.

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