Consumer Price Index (CPI)

• +0.1 vs +0.2 forecast
• CORE CPI (more important) +0.3 vs +0.2 forecast and +0.1 previously
• CORE y/y CPI +1.8 vs +1.7 forecast and +1.7 previously

Retail Sales

• +0.4 vs +0.4 forecast

CPI is the biggest market mover we have right now in terms of econ data.  The uptick in core inflation (both monthly and year-over-year) is the sole source of weakness just now.  Core year-over-year numbers had been running at a steady 1.7% for several months before ticking up to 1.8% in October (reported in November) and then back down to 1.7% again in Nov (reported in Dec).  

With today's return to 1.8%, investors are once again considering a broad-based, sustainable uptick in inflation.  Such an uptick would solidify the Fed's rate hike outlook--essentially guaranteeing higher rates in the short term (at least until the inverted yield curve brings about another recession).

Today's reaction is logical: a quick spike in 10yr yields from 2.54 to 2.58%.  In other words, CPI is the new NFP when it comes to the month's biggest economic data market mover (as discussed in the Day Ahead).  Fannie 3.5 MBS are down a quick quarter point to 101-25.  Bottom line, we knew a deviation from the forecast in CPI would be big news.  Unfortunately, the deviation wasn't in a friendly direction for bonds.