Inflation Signals Set Stage For Treasury Curve Steepening

By Michael J. Kramer of Mott Capital Management

Thursday, August 21, 2025 6:34 PM EDT

U.S. stocks finished the day lower, though not as much as I expected. I had mentally been ready for a 1% decline in the S&P 500, but instead, it fell by only 40 basis points. Still, if this plays out as expected over the next month, it will likely make little difference.

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If you looked at the S&P Global PMI data today, the Fed should not be cutting rates. If you looked at the Philly Fed Prices Paid Index, the same conclusion applies. That Philly Fed index rose to 66.8, the highest since July 2022, when CPI was running at 9% and PPI at 11.2%. This doesn’t mean inflation is heading back to those levels, but it does suggest the rate of change in inflation is accelerating, and quickly.

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Powell would be a fool tomorrow to suggest rate cuts are coming in September, or even hint at them. Based on Wednesday’s Fed minutes, to me, the odds of a September cut look slim to none. CPI swaps are clearly signalling the Fed should not be cutting rates—the 2-year CPI swap rose today to 2.94%. Cut rates now, and that pricing is likely to move much higher.

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In the meantime, rates remain stuck, but at some point, something has to give. The 30-year minus 3-month spread has been frozen around 70 bps since January. If the Fed isn’t cutting and inflation is rising, how can the curve not shift? It seems absurd that it has been stuck for months at this level. From a technical perspective, the spread is either forming one of the largest cup-and-handle patterns ever or a major ascending triangle. Either way, I think the curve is set to steepen materially—and it won’t be because the 3-month rate is falling, but because the 30-year yield is rising.

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If you’re looking for some excitement tonight, we get the Japan CPI report. Headline CPI is expected at 3.1% y/y, with core CPI (ex-fresh food and energy) at 3.4%. Meanwhile, the 30-year JGB closed last night at its highest yield in at least 25 years.

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Meanwhile, the 10-year JGB is also on the verge of breaking through significant resistance.

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More By This Author:

Why Stocks Are Suddenly Struggling
Liquidity Drains And Yield Spreads Put S&P 500 At A Crossroads
Draining Liquidity Signals Trouble For Equities

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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