If you’re thinking there has been a sea change in expectations this week, it’s because there has been. The March Consumer Price Index slammed the door on any hopes of a near-term rate cut with the year-over-year core CPI rising 3.8%. The CPI seems to have settled in at the 3.8% annual rate which is a level that is too high for the Fed to cut interest rates anytime soon. Reflecting that, many of the “Street” economists have withdrawn their forecast for a June rate hike and the possibility of two additional cuts this year and have now taken the safe forecast of one rate cut this year coming at the December meeting. Indeed, the Fed Fund futures have priced in a singular rate cut in the December contract.

Though the minutes of the recent FOMC meeting reconfirmed the committee’s expectation that they’ll cut the overnight rate three times this year, market consensus is moving away from that expectation. Fed fund futures had priced in as many as five rates cut by December at the start of this year. Instead, the future now implies about 60 basis points of rate cuts by the end of this year.

The bullish tone on which the bond market closed last week has completely reversed and is closing this week with a decidedly bearish resolve. The hope had been that the inflation measures this week would show further progress toward the Fed’s 2% target. That didn’t happen. Instead, the Consumer and Producer price indices both moved higher on a month-over-month basis in February. The core CPI index was 0.4% higher than the January measure, rounding to roughly 5.0%, a far cry from the Fed’s target.

This week proved disappointing in that each day was jammed with economic data and a parade of Fed speakers and the market barely budged. After last week’s range-bound trading we felt certain that interest rates would break out of their recent band. The best that traders could manage was a rally in the 2-year note taking the yield-to-maturity of that issue down to 4.53%, the lowest yield in nearly three weeks.

In last week’s wrap we cautioned that despite the core PCE deflator touching the Fed’s target, there was a risk that the CPI wouldn’t show the same improvement. Economists had forecasted that the consumer inflation measure would rise to 3.9% year-over-year. That’s exactly where it was reported, and the month-over-month core registered 0.4%. Despite matching the forecast, traders seemingly weren’t prepared for that result because yields across the curve skyrocketed. Obviously, the report took the possibility of an early Fed rate cut off the table. Fed fund futures are now indicating that the first cut has been pushed off to this summer. The 2-year note, which had traded as low as 4.14% last month, shot up to 4.65% on the news, before closing the week half of a basis point higher at 4.655%. The inflation news also took the “wind out of the sails” of the equity market, with the S&P 500 plunging 68 points by the close of business on Tuesday. That entire move has been erased though, with the index closing roughly unchanged for the week.