Today’s March consumer price index is more important than usual since it is one piece of data that traders say could change their assumptions on Fed policy.
Inflation has been stubbornly low, and the Fed has acknowledged that it expects inflation to rise but there are still few signs of it. "It's the only thing keeping the Fed from moving on the rate hike. Even with the lackluster nonfarm payrolls report, all the other signs would have suggested the Fed would have initiated liftoff by now had it not been for that decline in inflation. That's what makes Friday's report all the more relevant," said Ian Lyngen, senior Treasury strategist at CRT Capital.
The Treasury market has been super sensitive to Fed comments, and yields moved higher on comments from Vice Chairman Stanley Fischer, before moving lower on what were taken as more dovish comments from Atlanta Fed President Dennis Lockhart. The 10-year was at 1.88 percent in late trading after Lockhart said economic weakness means the Fed can take its time in raising short-term rates.
The CPI is expected to show headline inflation rose by 0.3 percent in March, compared to 0.2 percent in February. Core CPI, excluding food and energy, is expected to come in at 0.1 percent, off from the 0.2 percent last month. It is released at 8:30 a.m. ET.
"If you get another reading at 0.2 that makes the Fed feel a little more comfortable about inflation," said Robert Sinche, chief global strategist at Amherst Pierpont. “If it is weaker, like a zero, then the market will see last month's number as an aberration and push back expectations for a rate hike.”
Currently, most Fed watchers see rate hikes beginning in September or later.