US DATA REACT: Chris Low of FTN Financial notes that the y-o-y core
CPI fell from 1.6% to 1.3% – the lowest level since February 2004. “The
core has been trending lower since September 2006, when it reached a
cyclical peak of 2.9%,” he says. Headline inflation tends to converge on
the core over time, Low observes. The market looks for inflation to rise
quickly in 2011 (market doubtful the Fed can prevent the $1 trn-plus
increase in its balance sheet from expanding credit). “As it becomes
increasingly clear inflation is falling, not rising, it will allow the
FOMC to take its time and tighten only when it feels comfortable with
the trend in employment and it will allow 10-year yields to peak at
about 4.5%, when the Fed tightens, rather than the 5.5% some are
forecasting,” Low adds.